THE TRAVELERS VARIABLE
PRODUCTS FUNDS
ANNUAL REPORTS
DECEMBER 31, 1998
Managed Assets Trust
High Yield Bond Trust
Capital Appreciation Fund
Money Market Portfolio
The Travelers Series Trust:
U.S. Government Securities Portfolio
Social Awareness Stock Portfolio
Utilities Portfolio
[TravelersLife&Annuity
A Member of citigroup LOGO]
The Travelers Insurance Company
The Travelers Life and Annuity Company
One Tower Square
Hartford, CT 06183
<PAGE>
ANNUAL REPORT FOR THE TRAVELERS VARIABLE PRODUCTS FUNDS
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DEAR SHAREHOLDER:
We are pleased to provide the annual report for The Travelers Series Trust --
Managed Assets Trust, High Yield Bond Trust, Capital Appreciation Fund, Money
Market Portfolio ("Trust" or "Fund") and the Travelers Series Trust -- U.S.
Government Securities, Social Awareness Stock and Utilities Portfolios;
("Portfolio") for the year ended December 31, 1998.
In this letter, we briefly discuss general economic and market conditions. In
addition, more detailed comparisons showing the growth of a hypothetical $10,000
investment in each Trust or Portfolio since its inception date can be found in
this report. A more detailed summary of performance and current holdings for
each Trust or Portfolio can be found in the pages listed below.
<TABLE>
<CAPTION>
MARKET SCHEDULE OF
SUBACCOUNT COMMENTARY INVESTMENTS
- ---------- ---------- -----------
<S> <C> <C>
Managed Assets Trust.................................. 3 9
High Yield Bond Trust................................. 4 17
Capital Appreciation Fund............................. 5 23
Money Market Portfolio................................ 5 25
U.S. Government Securities Portfolio.................. 38 43
Social Awareness Stock Portfolio...................... 39 44
Utilities Portfolio................................... 39 47
</TABLE>
ECONOMIC REVIEW AND OUTLOOK
The year 1998 saw a widely gyrating U.S. stock market with different sectors
performing differently. The large-cap oriented S&P 500 Stock-Index ("S&P 500")
returned 28.72% for the year. The S&P 400 MidCap Index had a gain of roughly 5%
while the Russell 2000 Index had a negative return of 2.6% for the year ended
December 31, 1998. Dividend-paying defensive stocks such as utilities performed
better than the average small- and mid-cap stock. While technology stocks were
adversely impacted by the global financial crisis in late 1997, they have since
rebounded, led by Internet-related names.
The economies of the developed world flourished in 1998 while most emerging
markets went down. Low interest rates, robust consumer spending and benign
inflation fueled economic growth in the U.S. and Europe and created favorable
conditions for corporate profitability. In contrast, Russia's economy collapsed,
Asia's economies remained mired in recession and Brazil's economy faltered at
year-end after $30 billion was spent to defend its currency during the reporting
period.
The year was also a record year for mergers and acquisitions, nearly double
1997's total. The merger of oil giants Exxon and Mobil announced in December
will result in the creation of the world's largest company in terms of revenue.
In the digital world, merger activity between Internet service providers, phone
companies, cable companies and telecommunications firms heated up, as
"convergence" became the new mantra.
We remain guardedly optimistic about the resilient U.S. economy in the first
half of 1999 because we expect interest rates to stay low and the productivity
revolution through technology to continue. However, the risks from foreign
markets cannot be discounted and future corporate earnings may come under
increasing pressure.
FIXED INCOME MARKET COMMENTARY
Problems that started with Asia's currency devaluations in the summer of 1997
hit the bond market hard in August and September of 1998. Bond values fell
dramatically and asset-backed bonds, mortgage-backed securities, emerging-market
debt and corporate bonds all were negatively affected. In 1998, the more risk a
bond investor assumed, the more he or she suffered.
For the year ended December 31, 1998, the Lehman Government/Corporate Index
returned 9.47%. During the year, the spreads between different kinds of bonds
and U.S. Treasuries widened at record speed as investors gravitated to their
safety amidst rising stock market volatility and higher investor anxiety about
the global economy. The Federal Reserve Board ("Fed") then changed its monetary
policy from one of vigilance against inflation to one of combating deflation
during the reporting period and cut rates three times. So far in 1999, spreads
have tightened, bond market liquidity has returned and the bond market has
stabilized.
Markets and policy makers expect real U.S. economic growth to finally slow to
the 1%-2% level in 1998 after 3 years of 3%-plus growth. The slowdown is
expected to be led by a sharp reduction in the growth rate of investment
spending and
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ANNUAL REPORT FOR THE TRAVELERS VARIABLE PRODUCTS FUNDS
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continued weakness in the export sector. The Conference Board survey of
corporate sentiment indicates that capital-spending plans has not yet rebounded
with the stock market and consumer sentiment. Year 2000 ("Y2K") spending is
temporarily boosting capital spending, yet industrial overcapacity and several
years of rapid spending in technology make slower investment spending highly
likely.
However, a drop in the rate of consumer spending growth is essential to any
meaningful forecast of 1%-2% real GDP growth. This has not happened yet despite
two years where consumer spending has been close to consumer income. The wealth
effect from three years of 20%-plus stock market gains is estimated to increase
spending 1.5% more than implied by income growth. Lower interest rates, lower
oil and other commodity prices and declining import prices have further boosted
consumer purchasing power.
The tight employment market has also been a major force behind high consumer
confidence and spending plans. December brought a further sharp drop in oil
prices and continued record high (which substantially exceeded expectations)
auto sales and housing starts. Unless they were all caused by unseasonably warm
weather, these factors cause us to push any forecast of a consumer slowdown
further out into the future which should delay any further Fed rate cuts.
There are storm clouds on the horizon that could lead the consumer to retreat.
Latin America has been pushed into recession by last summer's emerging market
meltdown and could be subject to further pressure if a Brazilian crisis erupts.
Latin America has a larger economic impact on the U.S. than Asia and Russia do.
A decline in the stock market could rattle the consumer, although the stock
market's continued resilience means that a sustained downturn is required before
spending would be significantly impacted. Japan is also a big question mark.
Economic activity is now declining there after several years of flat growth.
Despite three rate cuts in the second half of 1998, it would be hard to say the
Fed has an easy monetary policy. Short-term interest rates are still more than
3% above inflation and are high relative to nominal growth. Credit market
spreads are high and banks are tightening credit standards. These factors create
a downward bias for short-term rates over the long-term, but rates are likely to
remain stable until the consumer slows down.
With the Fed on hold, there will be some upward pressure on long-term rates. But
slow growth outside the U.S. and continued low inflation should prevent rates
from rising too much. The fact that so much of the U.S. Treasury curve trades
below the federal-funds rate is a big factor in the continued high spreads in
the investment grade corporate market. Because of this, spreads should move to
offset the change in U.S. Treasury yields -- narrowing when yields rise and
widening when yields fall.
EQUITY MARKET COMMENTARY
The deepening global financial crisis and its adverse impact on global economies
and leveraged hedge funds sent the U.S. stock market into a tailspin during the
third quarter of 1998. The S&P 500 fell by almost 10% in the third quarter while
the Russell 2000 Index of smaller companies fared even worse with a decline of
20%.
The third quarter began on a promising note as stock prices rose by almost 5% in
the first half of July. From the then all-time highs established on July 17,
1998, a series of bad news related to political and currency turmoil led the
stock market down through the end of August. The market decline over that period
was close to 20%, which qualifies under most scenarios as a bear market.
The bulk of the bad news in August came from the political and economic crisis
in Russia and the continuing spread of the currency contagion. The collapse of
the Russian ruble and the restructuring of Russian debt triggered trading and
lending losses at brokerage firms and banks. The crisis in the financial sector
took a turn for the worse later in the quarter as several hedge funds disclosed
losses related to the global financial turmoil. Several stocks in the financial
sector saw their market value cut in half during the third quarter.
Increased uncertainty over Clinton's presidency and the bigger question of the
damage to corporate profits added to the volatility in the stock market. The
increased prospects of a global and U.S. economic slowdown led to some easing of
monetary policy. Japan first decreased short-term interest rates by 20 basis
points and the Fed followed suit with a 0.25% rate cut in late September. The
U.S. stock market rallied in anticipation of the rate cut and stock prices rose
by almost 6% in September.
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ANNUAL REPORT FOR THE TRAVELERS VARIABLE PRODUCTS FUNDS
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In the large-capitalization stock universe, high-quality growth stocks performed
better than value stocks in the third quarter of 1998. The utilities sector
produced the only positive performance in the third quarter while the financial
services and energy sectors at the other end of the spectrum fell by over 20%.
Large-cap technology and health care stocks held up reasonably well, but
consumer stocks declined sharply against the likely backdrop of an economic
slowdown.
A proactive and aggressive stance by the Fed halted the stock market slide early
in the fourth quarter of 1998 and sent stock prices soaring in November and
December. The fourth quarter rally erased losses from the third quarter and most
market measures reached new all-time highs.
The negative sentiment in the stock market persisted through the first week of
October as the S&P 500 fell another 6%. Investor concerns focused on the impact
of the Russian crisis and global lending and trading losses on U.S. economic and
earnings growth.
Sentiment reversed in the second week of October after most market indexes had
declined over 20% from their all-time highs. The reversal in trend turned into a
significant stock market rally when the Fed cut short term rates by an
unexpected 25 basis points in the middle of October. The surprise Fed action
raised hopes that a proactive stimulative monetary policy by most central banks
would avert a global recession.
The stock market rally, triggered by the unexpected Fed rate cut in mid-October,
continued almost unabated through the months of November and December. The
market was also helped by economic reports in the fourth quarter which were well
ahead of expectations. Despite the strength in the economy, interest rates
remained low mainly as a result of low inflation.
In the large-cap universe, all sectors except energy (which declined by 3%),
registered strong gains in the fourth quarter. The market rally was led by the
technology and health care sectors which rose by over 30%. The financial
services, transportation and producer durables sectors also performed well.
The performance of the U.S. stock market in 1998 proves yet again that interest
rate changes and liquidity flows may have a more dominant influence on stock
prices than most other factors. In a year where earnings growth was close to
zero, most measures of the U.S. stock market have risen by over 20%. Declining
interest rates, which fell from 5.9% to 5.1% during 1998, have triggered a
significant expansion in the market price/earnings ("P/E") multiple. The upward
pressure on stock prices has been further amplified by strong money flows as
yields on alternative investments have dwindled.
A notable aspect of the stock market performance in 1998 was the divergence in
returns across different styles and segments of the market. While the S&P 500
rose by 28.72% in 1998, the Russell 2000 actually declined by 2.6%. The gain in
large-company growth stocks of 42.2% was well ahead of the 14.7% advance of
large-company value stocks and almost out of sight
With earnings growth slowing down, the market P/E multiple has now reached 23
times 1998 earnings. It appears that the biggest risk to the stock market still
remains on the earnings front. Earnings estimates for 1999 remain high and it is
quite likely that these earnings forecasts will be revised down. Despite the
overhang of possible downward earnings revisions, we believe that support from
low interest rates should limit an excessive downside.
MANAGED ASSETS TRUST
Managed Assets Trust ("Trust") seeks to provide a high total investment return
through a fully managed investment policy. For the year ended December 31, 1998,
the Trust had a total return of 21.44% versus 28.72% for the 60% of the S&P 500
and 9.47% for the 40% of the Lehman Government/Corporate Index benchmark.
Returns were hurt by being slightly overweighted in stocks, the underperformance
of the convertible bond market and the underperformance of its corporate bonds.
In their disciplined approach to stock selection, the portfolio managers screen
their research universe of over 1,000 securities for companies that offer
improving fundamentals and relative earnings gains at discounted stock
valuations.
During the third quarter of 1998, stock selection in the consumer discretionary,
financial services and producer durables sectors had an adverse impact on
relative portfolio performance. Media stocks such as New York Times, Meredith
Corp. and Clear Channel Communications and their holdings in the retail sector
such as Jones Apparel and General Nutrition sold off sharply on concerns of
future earnings weakness resulting from a possible recession. The prospect of a
slower economy also hurt producer durable stocks like United Technologies and
Deere Corp. where the managers had a modest overweight
3
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ANNUAL REPORT FOR THE TRAVELERS VARIABLE PRODUCTS FUNDS
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position. Trading and lending losses during the third quarter devastated the
financial services sector. The managers' overweight positions in BankBoston,
Equitable Companies, Morgan Stanley Dean Witter and Merrill Lynch also hurt the
Trust's performance.
Their stock selection in the technology and energy sectors contributed
positively to portfolio performance in the third quarter. Their positions in
higher growth technology stocks such as Cisco Systems, EMC Corp. and Symbol
Technologies performed well in the third quarter. Being underweight in several
poorly performing stocks such as Computer Associates, Parametric Technologies
and 3Com Corp. also helped the Trust. In the energy sector, the managers gained
from underweight positions in stocks such as Royal Dutch and Occidental
Petroleum.
During the fourth quarter of 1998, stock selection was favorable in most
sectors. The biggest contributions to relative portfolio performance came from
the technology, health care, consumer discretionary, producer durables and
utilities sectors. In the technology sector, a number of the managers overweight
position in stable growth companies with rising earnings estimates such as Cisco
Systems, Symbol Technologies, EMC Corp., Dell Computers and Lucent Technologies
performed well. The biggest gain in the Trust's portfolio, however, came from
America Online which rose by 70% in December alone on the heels of a frenzied
pursuit of Internet stocks and its inclusion into the S&P 500 index on the last
day of the year. Guidant Corp, a leading manufacturer of cardiological
equipment, and Amgen, the world's largest biotechnology company, were top stock
picks in the health care sector. Both stocks rose by almost 50% in the fourth
quarter of 1998 on strong revenue growth and positive earnings surprises.
A strong recovery in retail and media stocks from their lows in the third
quarter helped performance in the consumer discretionary sector. The Trust's
retail holdings in Dayton Hudson, Staples Inc. and CVS Corp. performed well and
media stocks such as The New York Times and Clear Channel Communications
recovered from near-recession levels as investors felt reassured about economic
prospects after the Fed action to cut interest rates.
The managers good performance in the producer durables sector was achieved from
a combination of picking the winners in the sector and avoiding the losers.
Their emphasis on Tyco International, a world leader in security systems, paid
off while the managers avoided some of the bigger losers within the sector such
as Minnesota Mining and Lockheed Martin.
In the utilities sector, the managers have been emphasizing long-distance and
cellular telephone companies such as Airtouch Communications, Sprint PCS and MCI
Worldcom at the expense of the regional telephone companies and the electric
utilities group. They were rewarded in these positions as investors paid a
premium for the higher growth prospects of these companies within a relatively
low growth sector. A small sample of their current holdings is presented here to
illustrate their investment approach. In the technology sector, they focus on
higher growth industries like networking and software through their positions in
Symbol Technologies, EMC Corp., Cisco and Oracle which are still trading at
reasonable valuations. Their emphasis on Amgen Corp. and Guidant Corp., leaders
in the biotechnology and medical devices industries respectively, illustrates
how they seek growth at a reasonable price.
HIGH YIELD BOND TRUST
The High Yield Bond Trust ("Trust") seeks generous income. The assets of the
Trust will be invested in bonds which, as a class, sell at discounts from par
value and are typically high-risk securities. For the year ended December 31,
1998, the High Yield Bond Trust had a total return of 6.56%. In comparison, the
Lehman Aggregate Bond Index posted a total return of 8.69% for the same period.
The high yield bond market generated relatively weak results during the third
quarter of 1998, underperforming all of the other domestic bond market sectors.
By the end of September, the Fed began taking aggressive actions to restore
investor confidence in the financial markets. The Fed concluded that the
financial markets were beginning to freeze up and overall liquidity in the bond
market was disappearing. Many companies were finding it increasingly more
difficult to borrow money through bond markets. Moreover, there was a more
pronounced reluctance on the part of many investors to invest in new bonds,
especially from companies that issue high yield bonds. Fears that an economic
recession was becoming more likely given the turmoil in emerging market
economies such as Korea, Russia and Indonesia were also key market factors.
Moreover, investors became concerned that a worldwide credit crunch in the
financial markets might throw the U.S. economy into a meaningful recession. By
acting decisively and lowering short-term interest rates three times, the Fed
was able to
4
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ANNUAL REPORT FOR THE TRAVELERS VARIABLE PRODUCTS FUNDS
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stabilize the domestic financial markets and restore investor confidence. In the
fourth quarter of 1998, as investors slowly became more comfortable with the
economic outlook and the Fed's resolve to keep the economy out of a recession,
the high yield bond market stabilized and outperformed other bond sectors. Yet
because of a lingering uncertainty over the economy, the high yield bond market
trades at undervalued levels. As more investors become convinced that the U.S.
economy is still fundamentally sound, the high yield bond market should continue
to stabilize and prices should improve.
The portfolio manager viewed the recent correction in the high yield bond market
as a buying opportunity and carefully redeployed excess cash reserves into the
market during this time. However, given the continued problems in Asia, he
remained underweighted in basic commodity industries such as steel, forest
products, energy and petrochemicals, industries that have been negatively
affected by worldwide deflationary trends in recent months. (Deflation is when
prices actually fall. Deflation should not be confused with disinflation, which
is the slowing down of the rate at which prices increase).
The portfolio manager believes that the Trust is appropriately positioned for
current economic conditions, a period characterized by slower growth and
somewhat weaker corporate profits. It should be noted that he still does not
anticipate a domestic economic recession for 1999. Moreover, the manager plans
to stick with the Trust's relatively sound credit quality orientation given the
higher volatility in the financial markets.
CAPITAL APPRECIATION FUND
The Capital Appreciation Fund ("Fund") seeks growth of capital through the use
of common stocks. Income is not an objective. The Fund invests principally in
common stocks of small- to large-companies that are expected to experience wide
fluctuations in price in both rising and declining markets. For the year ended
December 31, 1998, the Capital Appreciation Fund posted a total return of
61.63%. In comparison, the Russell 2000 Index returned a negative 2.55% for the
same period.
Looking back over the past twelve months, 1998 will surely go down as one of the
market's most volatile years this decade. Continued uncertainty in Asia,
instability in other emerging markets and a clear slowdown in global economic
growth set the stage for a tumultuous and, at times, unforgiving marketplace.
Remarkably, when all was said and done, the S&P 500 Index posted an historic
fourth straight year of 20%-plus returns. However, only a select handful of
companies performed exceptionally well, which masked a segmented market where
many stocks actually produced negative results.
Turning to the Fund, it well outperformed its benchmark, the S&P 500 Index.
Gains were driven by its holdings in the technology, cable, and life sciences
industries. In particular, America Online and Cisco Systems rose sharply to post
strong gains for the year. These companies continued to capitalize on their
leading market positions while also leveraging their foothold in the growing
Internet landscape.
Turning to the telecommunications industry, the portfolio managers benefited
from very strong performance by Nokia, a company that is rapidly becoming the
dominant global provider of telecommunications equipment. Additionally, Denver-
based telecommunications company Qwest Communications saw its stock price more
than double during fourth quarter. The company recently signed a lucrative joint
venture contract with Microsoft.
In the pharmaceutical sector, Eli Lilly moved higher, due in part to positive
news on the cancer-fighting properties of its osteoporosis drug Evista. While
the vast majority of the Fund posted strong results, its position in Dell
Computer did lag the rest of the technology sector. While Dell continues to
generate impressive results, its expensive price tag put off some investors.
Nonetheless, the managers remain very upbeat on the position.
Looking ahead, the managers remain positive on the longer-term prospects for
growth stocks, especially in a low interest rate environment. They continue to
focus on companies that can grow their earnings in any kind of economic
conditions.
MONEY MARKET PORTFOLIO
Money Market Portfolio (formerly known as Cash Income Trust) ("Portfolio") seeks
to provide shareholders with high current income from short-term money market
instruments while emphasizing preservation of capital and maintaining a high
degree of liquidity. The Portfolio pursues this objective by investing in
securities maturing in one year or less.
5
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ANNUAL REPORT FOR THE TRAVELERS VARIABLE PRODUCTS FUNDS
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For the year ended December 31, 1998, the Portfolio generated an effective yield
of 5.08% and as of December 31, 1998, had an average maturity of 27 days. The
Portfolio continues to invest primarily in U.S. Treasuries and government agency
securities. This investment strategy has provided the Portfolio with safety,
liquidity and stability.
However, you should be aware that your investment in the Portfolio is neither
insured nor guaranteed by the U.S. Government. Moreover, no assurance can be
given that the Fund will be able to maintain a stable net asset value of $1.00
per share.
In closing, we would like to thank you for your investment in Managed Asset
Trust, High Yield Bond Trust, Capital Appreciation Fund and Money Market
Portfolio. We look forward to continuing to help you pursue your financial
goals.
Sincerely,
/s/ HEATH B. MCLENDON
Heath B. McLendon
Chairman
January 13, 1999
6
<PAGE>
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PERFORMANCE COMPARISON -- MANAGED ASSETS TRUST AS OF 12/31/98 (UNAUDITED)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
----------------------------------------------
<S> <C>
Year Ended 12/31/98 21.44%
Five Years Ended 12/31/98 15.81%
Ten Years Ended 12/31/98 14.27%
CUMULATIVE TOTAL RETURN
----------------------------------------------
4/8/83* through 12/31/98 416.87%
* Commencement of operations
</TABLE>
This chart assumes an initial investment of $10,000 made on
December 31, 1988, assuming reinvestment of dividends, through
December 31, 1998. The Lehman Government/Corporate Bond Index is a
weighted composite of the Lehman Government Bond Index, which is a
broad-based index of all public debt obligations of the U.S.
Government and its agencies and has an average maturity of nine
years and the Lehman Corporate Bond Index, which is comprised of
all public fixed-rate non-convertible investment-grade domestic
corporate debt, excluding collateralized mortgage obligations. The
Consumer Price Index is a measure of the average change in prices
over time in a fixed market basket of goods and services. The
Standard & Poor's 500 Index is an unmanaged index composed of 500
widely held common stocks listed on the New York Stock Exchange,
American Stock Exchange and over-the-counter market.
<TABLE>
<CAPTION>
Lehman Standard
Managed Government/Corporation Consumer & Poor's
Assets Bond Price 500
Trust Index Index Index
<S> <C> <C> <C> <C>
Dec-88 10000 10000 10000 10000
Dec-89 12712 11423 10465 13163
Dec-90 13026 12370 11103 12755
Dec-91 15854 14365 11443 16633
Dec-92 16668 15454 11775 17899
Dec-93 18224 17159 12099 19698
Dec-94 17815 16556 12423 19957
Dec-95 22646 19742 12738 24333
Dec-96 25766 20314 13160 29917
Dec-97 31257 22296 13383 39897
Dec-98 37960 24408 13598 51362
</TABLE>
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Past performance is not predictive of future performance. Investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
Average annual total returns are historical in nature and measure net investment
income and capital gain or loss from portfolio investments assuming reinvestment
of dividends. The returns do not reflect expenses associated with the subaccount
such as administrative fees, account charges and surrender charges which, if
reflected, would reduce the performance shown.
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON -- HIGH YIELD BOND TRUST AS OF 12/31/98 (UNAUDITED)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
----------------------------
<S> <C>
Year Ended 12/31/98 6.56%
Five Years Ended 12/31/98 10.44%
Ten Years Ended 12/31/98 9.44%
CUMULATIVE TOTAL RETURN
----------------------------------------------
3/19/82* through 12/31/98 407.17%
* Commencement of operations
</TABLE>
This chart assumes an initial investment of $10,000 made on
December 31, 1988, assuming reinvestment of dividends, through
December 31, 1998. The Lehman Aggregate Bond Index, an unmanaged
index, is composed of the Lehman Intermediate Government/Corporate
Bond Index and the Mortgage Backed Securities Index and includes
treasury issues, agency issues, corporate bond issues and mortgage-
backed securities. The Consumer Price Index is a measure of the
average change in prices over time in a fixed market basket of
goods and services. The First Boston High Yield Index Top Tier is a
broad-based market measure of high yield bonds, commonly known as
"junk bonds."
<TABLE>
<CAPTION>
First
Boston
High Lehman High
Yield Aggregate Consumer Yield
Bond Bond Price Index
Trust Index Index Top Tier
<S> <C> <C> <C> <C>
Dec-88 10000 10000 10000 10000
Dec-89 10140 11454 10465 11319
Dec-90 9215 12480 11103 11424
Dec-91 11620 14477 11443 14038
Dec-92 13149 15548 11775 15264
Dec-93 14991 17064 12099 17648
Dec-94 14802 16566 12423 17614
Dec-95 17092 19626 12738 20905
Dec-96 19835 20339 13160 23146
Dec-97 23120 22301 13383 25923
Dec-98 24636 24239 13598 26144
</TABLE>
- --------------------------------------------------------------------------------
Past performance is not predictive of future performance. Investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
Average annual total returns are historical in nature and measure net investment
income and capital gain or loss from portfolio investments assuming reinvestment
of dividends. The returns do not reflect expenses associated with the subaccount
such as administrative fees, account charges and surrender charges which, if
reflected, would reduce the performance shown.
7
<PAGE>
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PERFORMANCE COMPARISON -- CAPITAL APPRECIATION FUND AS OF 12/31/98 (UNAUDITED)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
----------------------------
<S> <C>
Year Ended 12/31/98 61.63%
Five Years Ended 12/31/98 27.67%
Ten Years Ended 12/31/98 21.01%
CUMULATIVE TOTAL RETURN
----------------------------------------------
3/19/82* through 12/31/98 1,637.61%
*Commencement of operations
</TABLE>
This chart assumes an initial investment of $10,000 made on
December 31, 1988, assuming reinvestment of dividends, through
December 31, 1998. The Standard & Poor's 500 Index is an unmanaged
index composed of 500 widely held common stocks listed on the New
York Stock Exchange, American Stock Exchange and over-the-counter
market. The Russell 2000 Index is a capitalization weighted total
return index which is comprised of 2,000 of the smallest capitaled
U.S. domiciled companies with less than average growth orientation
whose common stock is traded in the United States of the New York
Stock Exchange, American Stock Exchange and NASDAQ. The Consumer
Price Index is a measure of the average change in prices over time
in a fixed market basket of goods and services.
<TABLE>
<CAPTION>
CAPITAL APPRECIATION STANDARD & POOR'S
FUND 500 INDEX RUSSELL 2000 INDEX CONSUMER PRICE INDEX
-------------------- ----------------- ------------------ --------------------
<S> <C> <C> <C> <C>
12/88 10000 10000 10000 10000
12/89 11571 13163 11627 10465
12/90 10849 12755 9362 11103
12/91 14664 16633 13673 11443
12/92 17245 17899 16189 11775
12/93 19848 19698 19245 12099
12/94 18903 19957 7986 12423
12/95 25777 24333 10258 12738
12/96 33047 29917 11951 13160
12/97 41687 39923 14624 13383
12/98 67378 51396 14252 13524
</TABLE>
- --------------------------------------------------------------------------------
Past performance is not predictive of future performance. Investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
Average annual total returns are historical in nature and measure net investment
income and capital gains or losses from portfolio investments assuming
reinvestments of dividends. The returns do not reflect expenses associated with
the subaccount such as administrative fees, account charges and surrender
charges which, if reflected, would reduce the performance shown.
8
<PAGE>
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SCHEDULES OF INVESTMENTS DECEMBER 31, 1998
MANAGED ASSETS TRUST
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- -----------------------------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCK -- 71.3%
- -----------------------------------------------------------------------------------------------------
CONSUMER CYCLICALS -- 9.7%
6,904 Clorox Co. ................................................. $ 806,474
5,492 Colgate-Palmolive Co. ...................................... 510,070
14,700 Comcast Corp., Class A Shares............................... 863,166
9,500 Costco Cos., Inc. (a)....................................... 687,266
19,027 CVS Corp. .................................................. 1,046,485
5,816 Eastman Kodak Co. .......................................... 418,752
15,594 Fruit of the Loom Inc., Class A Shares (a).................. 215,392
9,611 Gannett Co. ................................................ 636,128
11,475 Gap Inc. ................................................... 645,469
12,946 Gillette Corp. ............................................. 625,454
34,130 Home Depot, Inc. ........................................... 2,088,329
4,610 J.C. Penney Co. ............................................ 216,094
26,284 K-Mart Corp. (a)............................................ 402,474
9,364 Kimberly-Clark Corp. ....................................... 510,338
10,984 Kroger Co. (a).............................................. 664,532
4,217 May Department Stores Co. .................................. 254,601
9,121 Maytag Corp. ............................................... 567,782
12,161 McDonald's Corp. ........................................... 931,837
16,477 MediaOne Group, Inc. (a).................................... 774,419
12,261 New York Times Co., Class A Shares.......................... 425,303
11,377 Nordstrom Inc. ............................................. 394,640
26,342 Procter & Gamble Co. ....................................... 2,405,354
12,300 Rite Aid Corp. ............................................. 609,619
15,862 Safeway Inc. (a)............................................ 966,591
16,084 Staples Inc. (a)............................................ 702,670
8,631 Tele-Communications, Inc. (a)............................... 477,672
19,222 Time Warner, Inc. .......................................... 1,192,965
7,258 Times Mirror Co., Class A Shares............................ 406,448
22,165 TJX Cos., Inc. ............................................. 642,785
12,513 Unilever NV................................................. 1,037,797
5,885 Viacom Inc. Non-Voting, Class B Shares (a).................. 435,490
39,230 Wal-Mart Corp. ............................................. 3,194,793
27,295 Walt Disney Co. ............................................ 818,850
- -----------------------------------------------------------------------------------------------------
26,576,039
- -----------------------------------------------------------------------------------------------------
CONSUMER STAPLES -- 4.6%
13,927 Adolph Coors Co., Class B Shares............................ 786,440
8,827 Anheuser-Busch Cos., Inc. .................................. 579,272
8,700 Campbell Soup Co. .......................................... 478,500
45,905 Coca-Cola Co. .............................................. 3,069,897
13,869 H.J. Heinz Co. ............................................. 785,332
12,946 Interstate Bakeries Corp. .................................. 342,260
7,160 Kellogg Co. ................................................ 244,335
4,315 Loews Corp. ................................................ 423,949
36,280 Pepsico Inc. ............................................... 1,485,213
56,215 Philip Morris Cos., Inc. ................................... 3,007,503
34,326 Sara Lee Corp. ............................................. 967,564
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
MANAGED ASSETS TRUST
<TABLE>
11,279 Suiza Foods Corp. (a). $ 574,524
<C> <S> <C>
363 Vlasic Foods International Inc. (a)......................... 8,644
- -----------------------------------------------------------------------------------------------------
12,753,433
- -----------------------------------------------------------------------------------------------------
ENERGY -- 0.2%
4,610 Halliburton Resources, Inc. ................................ 136,571
8,238 Schlumberger Ltd. .......................................... 379,978
- -----------------------------------------------------------------------------------------------------
516,549
- -----------------------------------------------------------------------------------------------------
FINANCIAL SERVICES -- 10.6%
24,254 Allstate Corp. ............................................. 936,811
6,081 Ambac Financial Group, Inc. ................................ 366,000
12,783 American Express Co. ....................................... 1,307,062
24,751 American International Group, Inc. ......................... 2,391,565
15,530 Associates First Capital Corp. ............................. 658,084
12,421 Bank One Corp. ............................................. 634,247
38,676 BankAmerica Corp. .......................................... 2,325,395
14,319 BankBoston Corp. ........................................... 557,546
3,236 Capital One Financial Co. .................................. 372,140
20,568 Chase Manhattan Corp. ...................................... 1,399,910
7,797 Comerica, Inc. ............................................. 531,658
8,434 Countrywide Credit Industries, Inc. ........................ 423,281
24,152 Fannie Mae.................................................. 1,787,248
12,750 Federal Home Loan Mortgage Co. ............................. 821,578
7,700 Fifth Third Bancorp......................................... 549,347
5,492 First Union Corp. of North Carolina......................... 333,982
18,046 Fleet Financial Group, Inc. ................................ 806,431
5,198 Golden West Financial Corp. ................................ 476,592
10,004 Hartford Financial Services Group, Inc. .................... 548,970
20,200 Household International, Inc. .............................. 800,425
4,413 J.P. Morgan & Co. .......................................... 463,641
16,281 Lehman Brothers Holdings, Inc. ............................. 717,382
648 M&T Bank Corp. ............................................. 336,272
17,975 Merrill Lynch & Co., Inc. .................................. 1,199,831
20,841 Morgan Stanley, Dean Witter & Co. .......................... 1,479,711
11,500 National City Corp. ........................................ 833,750
5,394 PNC Bank Corp. ............................................. 291,950
9,906 Republic New York Corp. .................................... 451,342
7,748 State Street Corp. ......................................... 538,970
13,338 Summit Bancorp.............................................. 582,704
9,513 SunAmerica Inc. ............................................ 771,742
11,311 SunTrust Banks, Inc. ....................................... 865,292
4,400 TransAmerica Corp. ......................................... 508,200
11,146 Washington Mutual Inc. ..................................... 425,638
43,600 Wells Fargo & Co. .......................................... 1,741,275
- -----------------------------------------------------------------------------------------------------
29,235,972
- -----------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
MANAGED ASSETS TRUST
<TABLE>
<C> <S> <C>
HEALTH CARE -- 9.0%
28,246 Abbott Laboratories......................................... $ 1,384,054
29,913 American Home Products Corp. ............................... 1,684,476
9,410 Amgen Inc. (a).............................................. 983,345
11,000 Baxter International Inc. .................................. 707,438
17,948 Bristol-Myers Squibb Co. ................................... 2,401,667
21 Crescendo Pharmaceutical Corp. (a).......................... 288
20,204 Eli Lilly & Co. ............................................ 1,795,631
8,002 Guidant Corp. (a)........................................... 882,221
22,557 HBO & Co. .................................................. 647,104
30,011 Healthsouth Corp. (a)....................................... 463,295
27,211 Johnson & Johnson........................................... 2,282,323
14,233 Medtronic Inc. ............................................. 1,056,800
21,969 Merck & Co. ................................................ 3,244,547
24,299 Pfizer Inc. ................................................ 3,048,006
9,121 Pharmacia & Upjohn, Inc. ................................... 516,477
27,068 Schering-Plough Corp. ...................................... 1,495,507
20,007 Warner-Lambert Co. ......................................... 1,504,276
5,688 Watson Pharmaceuticals, Inc. (a)............................ 357,633
4,400 Wellpoint Heath Networks, Inc. (a).......................... 382,800
- -----------------------------------------------------------------------------------------------------
24,837,888
- -----------------------------------------------------------------------------------------------------
INSURANCE -- 0.4%
9,709 Everest Reinsurance Holdings, Inc. ......................... 378,044
9,268 Marsh & McLennan Cos., Inc. ................................ 541,599
3,580 Transatlantic Holdings, Inc. ............................... 270,514
- -----------------------------------------------------------------------------------------------------
1,190,157
- -----------------------------------------------------------------------------------------------------
MATERIALS & PROCESSING -- 2.8%
10,535 Aluminum Co. of America..................................... 785,516
27,167 Bethlehem Steel Corp. (a)................................... 227,524
15,496 Crompton & Knowles Corp. ................................... 320,574
19,027 Dayton-Hudson Corp. ........................................ 1,032,215
18,438 E.I. du Pont de Nemours & Co. .............................. 978,366
4,511 Georgia-Pacific Corp. (Timber Group)........................ 107,418
8,042 Georgia-Pacific Group....................................... 470,960
5,002 International Paper Co. .................................... 224,152
10,788 Lyondell Chemical Co. ...................................... 194,184
22,165 Masco Corp. ................................................ 637,244
5,492 Mercury General Corp. ...................................... 240,618
9,906 Mead Corp. ................................................. 290,370
9,808 Monsanto Co. ............................................... 465,880
11,300 Praxair Inc. ............................................... 398,325
802 Raytheon Co., Class A Shares................................ 41,453
6,963 Raytheon Co., Class B Shares................................ 370,780
9,513 Sealed Air Corp. (a)........................................ 485,758
3,335 Weyerhauser Co. ............................................ 169,460
10,298 Willamette Industries, Inc. ................................ 344,983
- -----------------------------------------------------------------------------------------------------
7,785,780
- -----------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
MANAGED ASSETS TRUST
<TABLE>
<C> <S> <C>
OIL -- 3.9%
17,556 Amoco Corp. ................................................ $ 1,059,944
10,690 Atlantic Richfield Co. ..................................... 697,523
9,709 Burlington Resources Inc. .................................. 347,704
10,984 Chevron Corp. .............................................. 910,986
5,394 Enron Corp. ................................................ 307,795
45,017 Exxon Corp. ................................................ 3,291,868
15,442 Mobil Corp. ................................................ 1,345,384
28,834 Royal Dutch Petroleum Co. ADR............................... 1,380,428
15,300 Texaco Inc. ................................................ 808,988
18,634 Unocal Corp. ............................................... 543,880
- -----------------------------------------------------------------------------------------------------
10,694,500
- -----------------------------------------------------------------------------------------------------
PRODUCER DURABLES -- 5.7%
16,643 Boeing Co. ................................................. 542,978
6,767 Caterpillar Inc. ........................................... 311,282
23,048 CBS Corp. .................................................. 754,822
9,709 Cordant Technologies Inc. .................................. 364,088
16,603 Crane Co. .................................................. 501,203
10,396 Deere & Co. ................................................ 344,368
4,119 Dow Chemical Co. ........................................... 374,572
17,359 EG&G Inc. .................................................. 482,797
7,454 Emerson Electric Co. ....................................... 466,341
13,927 Entergy Corp. .............................................. 433,478
8,925 General Dynamics Corp. ..................................... 523,228
65,834 General Electric Co. ....................................... 6,748,333
5,786 Honeywell Inc. ............................................. 435,758
12,259 Ingersoll-Rand Co. ......................................... 575,407
11,965 Kaufman & Broad Home Corp. ................................. 343,994
4,904 Pitney Bowes Inc. .......................................... 323,971
13,731 Pulte Corp. ................................................ 381,893
11,279 20th Century Industries..................................... 261,532
9,611 United Technologies Corp. .................................. 1,045,196
10,396 Waste Management Inc. ...................................... 484,714
- -----------------------------------------------------------------------------------------------------
15,699,955
- -----------------------------------------------------------------------------------------------------
TECHNOLOGY -- 14.0%
11,963 Applied Materials Inc. (a).................................. 511,044
7,109 Ceridian Corp. (a).......................................... 496,297
36,082 Cisco Systems Inc. (a)...................................... 3,349,988
31,882 Compaq Computer Corp. ...................................... 1,337,051
8,844 Computer Sciences Corp. .................................... 569,885
6,767 Compuware Corp. (a)......................................... 528,460
30,242 Dell Computer Corp. (a)..................................... 2,214,281
20,988 Edison International........................................ 585,041
14,279 EMC Corp. (a)............................................... 1,213,715
2,942 Gateway 2000 Inc. (a)....................................... 150,594
16,000 Hewlett Packard Co. ........................................ 1,093,000
38,063 Intel Corp. ................................................ 4,511,655
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
MANAGED ASSETS TRUST
<TABLE>
20,694 International Business Machines Corp. . $ 3,823,217
<C> <S> <C>
28,970 Lucent Technologies Inc. ................................... 3,186,700
12,554 Meredith Corp. ............................................. 475,483
51,367 Microsoft Corp. (a)......................................... 7,115,935
10,690 Motorola Inc. .............................................. 652,758
23,877 Oracle Corp. (a)............................................ 1,030,442
16,200 PP&L Resources, Inc. ....................................... 451,575
4,200 Sun Microsystems Inc. (a)................................... 359,363
6,534 Symbol Technologies, Inc. .................................. 417,768
23,244 Sysco Corp. ................................................ 637,757
3,629 Tellabs Inc. (a)............................................ 248,813
7,667 Texas Instruments Inc. ..................................... 656,008
15,398 3Com Corp. (a).............................................. 690,504
19,223 Tyco International Ltd. .................................... 1,450,136
5,688 Xerox Corp. ................................................ 671,184
- -----------------------------------------------------------------------------------------------------
38,428,654
- -----------------------------------------------------------------------------------------------------
TRANSPORTATION -- 1.7%
3,374 AMR Corp. (a)............................................... 200,331
8,827 CSX Corp. .................................................. 366,321
3,240 DaimlerChrysler AG (a)...................................... 311,243
29,717 Ford Motor Co. ............................................. 1,744,016
8,842 General Motors Corp. ....................................... 632,756
8,800 Lear Corp. (a).............................................. 338,800
17,323 Navistar International Corp. (a)............................ 493,706
9,200 TRW Inc. ................................................... 516,925
3,629 Union Pacific Corp. ........................................ 163,532
- -----------------------------------------------------------------------------------------------------
4,767,630
- -----------------------------------------------------------------------------------------------------
UTILITIES -- 8.7%
14,300 AES Corp. (a)............................................... 677,463
19,713 Airtouch Communications Inc. (a)............................ 1,421,800
11,769 Alltell Corp. .............................................. 703,933
6,034 America Online Inc. ........................................ 873,422
19,223 Ameritech Corp. ............................................ 1,218,258
33,982 AT&T Corp. ................................................. 2,557,146
30,414 Bell Atlantic Corp. ........................................ 1,727,895
34,718 Bellsouth Corp. ............................................ 1,731,560
22,263 Central & South West Corp. ................................. 610,841
15,142 Clear Channel Communications Inc. (a)....................... 825,239
6,473 Columbia Energy Group....................................... 373,816
8,925 FPL Group Inc. ............................................. 550,003
14,373 GTE Corp. .................................................. 969,279
4,511 Houston Industries, Inc. ................................... 144,916
44,435 MCI WorldCom, Inc. (a)...................................... 3,189,600
22,700 Nextel Communications, Inc. (a)............................. 536,997
33,497 SBC Communications, Inc. ................................... 1,796,277
7,944 Sonat Inc. ................................................. 214,985
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
MANAGED ASSETS TRUST
<TABLE>
11,573 Southern Co. . $ 336,320
<C> <S> <C>
8,453 Sprint Corp. ............................................... 711,109
31,276 Sprint Corp. PCS Group (a).................................. 723,258
16,281 Texas Utilities Co. ........................................ 760,119
8,223 U.S. West Communications Group.............................. 531,411
22,754 Williams Cos., Inc. ........................................ 709,640
- -----------------------------------------------------------------------------------------------------
23,895,287
- -----------------------------------------------------------------------------------------------------
TOTAL COMMON STOCK (Cost -- $126,236,101)................... 196,381,844
- -----------------------------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCK -- 1.7%
- -----------------------------------------------------------------------------------------------------
FINANCIAL -- 0.9%
6,000 Equity Office Properties Trust, 5.250%...................... 251,250
8,000 Equity Residential Properties, 2.150%....................... 212,000
18,564 Equity Residential Properties, 7.250%....................... 399,126
2,000 Finova Finance, 5.500%...................................... 148,625
12,000 General Growth Properties, 7.250%........................... 309,000
8,000 National Australia Bank, 7.875%............................. 223,000
3,720 New Plan Excel Realty Insurance, 8.500%..................... 105,904
6,000 Newell Financial Trust, 5.250%.............................. 316,500
4,000 Reckson Associates Realty Services, 7.625%.................. 84,500
5,000 Tosco Financial Trust, 5.750%............................... 238,125
2,245 Union Pacific Capital Trust, 6.250%......................... 102,989
- -----------------------------------------------------------------------------------------------------
2,391,019
- -----------------------------------------------------------------------------------------------------
INDUSTRIAL -- 0.8%
4,000 Amcor Ltd, 7.250%........................................... 179,500
10,000 Calenergy Capital II, 6.250% (b)............................ 410,000
2,230 El Paso Energy Capital, 4.750%.............................. 106,761
12,000 International Paper Co., 5.250%............................. 589,500
10,990 News Corp. Ltd., 5.000%..................................... 964,373
- -----------------------------------------------------------------------------------------------------
2,250,134
- -----------------------------------------------------------------------------------------------------
TOTAL CONVERTIBLE PREFERRED STOCK (Cost -- $4,731,504)...... 4,641,153
- -----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT RATING+ SECURITY VALUE
<C> <S> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
CORPORATE BONDS -- 10.8%
- ------------------------------------------------------------------------------------------------------------------
FINANCIAL -- 3.8%
$5,000,000 Baa2* Nationwide Health Properties, Inc., Notes, 6.900% due
10/1/37..................................................... 5,343,750
2,500,000 Baa1* Simon Debartolo, Company Guaranteed, 6.750% due 7/15/04..... 2,478,125
2,500,000 Baa2* Spieker Properties Inc., Notes, 8.000% due 7/19/05.......... 2,609,375
- ------------------------------------------------------------------------------------------------------------------
10,431,250
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
MANAGED ASSETS TRUST
<TABLE>
<C> <S> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
INDUSTRIAL -- 3.6%
$2,000,000 A Cox Communications Inc., Notes, 6.875% due 6/15/05.......... $ 2,130,000
2,500,000 Baa* ProLogis Trust, Sr. Notes, 7.050% due 7/15/06............... 2,515,625
5,000,000 A Xerox Corp., Notes, 6.250% due 11/15/26..................... 5,287,500
- ------------------------------------------------------------------------------------------------------------------
9,933,125
- ------------------------------------------------------------------------------------------------------------------
TELEPHONE -- 1.9%
5,000,000 AAA Bellsouth Capital Funding, Debentures, 6.040% due
11/15/26.................................................... 5,175,000
- ------------------------------------------------------------------------------------------------------------------
TRANSPORTATION -- 1.5%
3,000,000 Baa2* CSX Corp., Debentures, 6.950% due 5/1/27.................... 3,198,750
836,617 NR Willmington Trust, 9.250% due 1/2/07........................ 838,659
- ------------------------------------------------------------------------------------------------------------------
4,037,409
- ------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS (Cost -- 27,520,460).................. 29,576,784
- ------------------------------------------------------------------------------------------------------------------
CONVERTIBLE CORPORATE BONDS -- 2.7%
- ------------------------------------------------------------------------------------------------------------------
FINANCIAL -- 0.4%
Bell Atlantic Corp., Bonds:
297,000 A+ 5.750% due 4/1/03........................................... 310,552
300,000 A1* 4.250% due 9/15/05.......................................... 311,625
400,000 BBB- Elan International Finance Ltd., Company Guaranteed, zero
coupon due 12/12/18......................................... 226,500
300,000 Baa* Security Capital U.S. Realty, Bonds, 2.000% due 5/22/03..... 237,000
- ------------------------------------------------------------------------------------------------------------------
1,085,677
- ------------------------------------------------------------------------------------------------------------------
INDUSTRIAL -- 2.1%
380,000 BBB- Alza Corp., Sub. Notes, zero coupon due 7/14/14............. 260,300
146,000 BBB- Athena Neurosciences Inc., Notes, 4.750% 11/15/04........... 172,828
321,000 A- Diamond Offshore Drilling Inc., Sub. Notes, 3.750% due
2/15/07..................................................... 289,301
300,000 NR Genzyme Corp., Sub. Notes, 5.250% due 6/1/05................ 396,375
300,000 Aa2* GVC Corp. Ltd., Bonds, zero coupon due 5/21/02 (b).......... 333,000
300,000 BBB- Inco Ltd., Debentures, 7.750% due 3/15/16................... 267,000
300,000 AA- Indian Petrochemicals Corp. Ltd., Bonds, 2.500% due 3/11/02
(b)......................................................... 302,250
600,000 BBB Ingram Micro Inc., Debenture, zero coupon due 6/9/18........ 208,500
300,000 BB+ Interim Services Inc., Sub. Notes, 4.500% due 6/1/05........ 264,375
200,000 NR Interpublic Group of Cos., Inc., Sub. Notes, 1.800% due
9/16/04..................................................... 222,250
570,000 A- Koninklijke Ahold, Sub. Notes, 3.000% 9/30/03............... 361,893
431,000 BBB- Lennar Corp., Debenture, zero coupon due 7/29/18............ 191,795
1,000,000 B2* Marriott International Inc., Debenture, zero coupon due
3/25/11..................................................... 651,250
200,000 A- Omnicon Group Inc., Sub. Debenture, 2.250% due 1/6/13....... 269,500
200,000 BBB- Rite Aid Corp., Sub. Notes, 5.250% due 9/15/02.............. 291,250
500,000 BBB Scholastic Corp., Sub. Notes, 5.000% due 8/15/05............ 483,750
238,000 BBB- STMicroelectronics NV, Sub. Notes, zero coupon due
6/10/08..................................................... 215,390
200,000 Aa1* Taiwan Semiconductor Manufacturing Co., Unsubordinated
Notes,
zero coupon due 7/3/02 (b).................................. 230,750
200,000 A+ Telefonica Europa, Company Guaranteed, 2.000% due 7/15/02... 297,000
100,000 A- Thermo Electron Corp., Sub. Debenture, 4.250% due 1/1/03.... 90,125
100,000 A- Thermo Instruments Inc., Company Guaranteed, 4.000% due
1/15/05..................................................... 82,000
- ------------------------------------------------------------------------------------------------------------------
5,880,882
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
MANAGED ASSETS TRUST
<TABLE>
<C> <S> <C>
- ------------------------------------------------------------------------------------------------------------------
UTILITY -- ELECTRIC -- 0.2%
$ 600,000 A- Potomac Electric Power, 5.000% due 9/1/02................... $ 582,000
- ------------------------------------------------------------------------------------------------------------------
TOTAL CONVERTIBLE CORPORATE BONDS (Cost -- $6,933,124)...... 7,548,559
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
FACE
AMOUNT SECURITY VALUE
<C> <S> <C> <C>
U.S. GOVERNMENT SECTOR -- 12.7%
1,500,000 U.S. Treasury Notes, 6.125% due 8/15/07..................... 1,642,110
3,100,000 U.S. Treasury Bond, 7.125% due 2/15/23...................... 3,816,007
28,000,000 U.S. Treasury Strips, zero coupon due 5/15/11............... 14,754,880
3,156,072 FHLMC, 8.000% due 9/1/04.................................... 3,252,711
186,909 FHLMC, 8.500% due 9/1/02.................................... 192,866
2,197,296 FNMA, 5.500% due 8/1/28 (c)................................. 2,118,325
3,921,708 FNMA, 6.000% due 7/1/28 (c)................................. 3,875,124
980,153 FNMA, 6.500% due 12/1/27.................................... 987,191
108,614 FNMA, 8.500% due 3/1/05..................................... 113,129
3,249,886 FNMA Dwarf, 6.000% due 1/1/13............................... 3,261,034
189,535 GNMA, 7.500% due 5/15/23 (c)................................ 195,575
273,904 GNMA, 9.000% due 11/15/19 (c)............................... 292,478
292,315 GNMA, 9.500% due 3/15/20 (c)................................ 315,700
- ------------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT SECTOR (Cost -- $35,429,097).......... 34,817,130
- ------------------------------------------------------------------------------------------------------------------
SHORT TERM U.S. GOVERNMENT INSTRUMENTS -- 0.2%
633,000 U.S. Treasury Bill, 4.330% due 3/18/99 (Cost -- $627,214)... 627,214
- ------------------------------------------------------------------------------------------------------------------
SUB-TOTAL INVESTMENTS (Cost -- $201,477,500)................ 273,592,684
- ------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT -- 0.6%
1,741,000 Morgan Stanley, Dean Witter & Co., 4.620% due 1/4/99;
Proceeds at maturity -- $1,741,894; (Fully collateralized by
U.S. Treasury Bonds, 8.750% due 8/15/20; Market
value -- $1,776,076) (Cost -- $1,741,000)................... 1,741,000
- ------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100% (Cost -- $203,218,500**).......... $275,333,684
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Non-income producing security.
(b) Security is exempt from registration under rule 144A of the Securities Act
of 1933. This security may be sold in transactions that are exempt from
registration, normally to qualified institutional buyers.
(c) Date shown represents the last in range of maturity dates of mortgage
certificates owned.
+ All ratings are by Standard & Poor's Ratings Services, except that those
identified by an asterisk (*) are rated by Moody's Investors Service Inc.
** Aggregate cost for Federal income tax purposes is substantially the same.
See page 22 for definitions of ratings.
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
HIGH YIELD BOND TRUST
<TABLE>
<CAPTION>
FACE
AMOUNT RATING+ SECURITY VALUE
- ---------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
CORPORATE BONDS AND NOTES -- 89.2%
- ---------------------------------------------------------------------------------------------------
CHEMICALS -- 0.6%
$ 155,000 B Polymer Group Inc., Company Guaranteed, Series B, 9.000% due
7/1/07.................................................... $ 153,450
- ---------------------------------------------------------------------------------------------------
CONSUMER NON-DURABLES -- 2.4%
350,000 B Grove Holdings LLC, step bond to yield 11.625% due 5/1/09... 147,000
485,000 B- Tropical Sportswear International Corp., Company Guaranteed,
11.000% due 6/15/08....................................... 511,674
- ---------------------------------------------------------------------------------------------------
658,674
- ---------------------------------------------------------------------------------------------------
ENERGY -- 5.1%
360,000 B Cross Timbers Oil Co., Sr. Sub. Notes, 9.250% due 4/1/07.... 332,100
310,000 B- International Utility Structures Inc., Sr. Sub. Notes,
10.750% due 2/1/08........................................ 291,400
365,000 B+ Parker Drilling Co., Company Guaranteed, 9.750% due
11/15/06.................................................. 326,675
180,000 BB- Pride Petroleum Inc., Sr. Notes, 9.375% due 5/1/07.......... 170,100
250,000 BB+ Tuscon Electric Power Co., Collateral Trust, 7.500% due
8/1/08.................................................... 260,625
- ---------------------------------------------------------------------------------------------------
1,380,900
- ---------------------------------------------------------------------------------------------------
FINANCIAL SERVICES -- 0.6%
90,000 B- B.F. Saul Real Estate Investment Trust, Sr. Notes, 9.750%
due 4/1/08................................................ 82,800
120,000 B+ Pioneer Americas Acquisition, Company Guaranteed, 9.250% due
6/15/07................................................... 93,600
- ---------------------------------------------------------------------------------------------------
176,400
- ---------------------------------------------------------------------------------------------------
FOOD AND DRUG -- 4.2%
120,000 B Agrilink Foods, Sr. Sub. Notes, 11.875% due 11/1/08......... 122,400
510,000 B Archibald Candy Corp., Company Guaranteed, 10.250% due
7/1/04.................................................... 517,650
490,000 B- Duane Reade Inc., Company Guaranteed, 9.250% due 2/15/08.... 501,025
- ---------------------------------------------------------------------------------------------------
1,141,075
- ---------------------------------------------------------------------------------------------------
GAMING/LEISURE -- 9.5%
Bally Total Fitness Holdings Corp., Sr. Sub. Notes:
420,000 B+ 9.875% due 10/15/07......................................... 411,600
120,000 B+ 9.875% due 10/15/07 (a)..................................... 117,600
400,000 Ba3* Grand Casinos Inc., 1st Mortgage Notes, 10.125% due
12/1/03................................................... 436,000
350,000 BB+ Harrah's Operating Co. Inc., Company Guaranteed, 7.875% due
12/15/05.................................................. 351,750
150,000 B Hollywood Park Inc., Sr. Sub. Notes, 9.500% due 8/1/07...... 148,875
325,000 B+ Prime Hospitality Corp., Sr. Sub. Notes, 9.750% due
4/1/07.................................................... 328,250
Regal Cinemas Inc., Sr. Notes:
140,000 B 9.500% due 6/1/08........................................... 145,950
75,000 B 9.500% due 6/1/08 (a)....................................... 78,187
Station Casinos Inc., Sr. Sub. Notes:
360,000 B+ 10.125% due 3/15/06......................................... 377,100
200,000 B+ 8.875% due 12/1/08.......................................... 201,500
- ---------------------------------------------------------------------------------------------------
2,596,812
- ---------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
17
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
HIGH YIELD BOND TRUST
<TABLE>
<C> <S> <C> <C>
HEALTH CARE -- 3.0%
$ 250,000 B+ PSS World Medical Inc., Company Guaranteed, 8.500% due
10/1/07................................................... $ 261,563
350,000 B- Production Resource Group, Sr. Sub. Notes, 11.500% due
1/15/08................................................... 344,750
205,000 B+ Unilab Corp., Sr. Notes, 11.000% due 4/1/06................. 213,200
- --------------------------------------------------------------------------------------------------
819,513
- --------------------------------------------------------------------------------------------------
HOUSING -- 2.2%
250,000 B+ Beazer Homes USA Inc., Company Guaranteed, 8.875% due
4/1/08.................................................... 241,250
350,000 BB+ Greystone Homes Inc., Sr. Notes, 10.750% due 3/1/04......... 371,000
- --------------------------------------------------------------------------------------------------
612,250
- --------------------------------------------------------------------------------------------------
INFORMATION/TECHNOLOGY -- 4.5%
420,000 B- PSINet Inc., Sr. Notes, 10.000% due 2/15/05................. 415,980
160,000 BB- Unisys Corp., Sr. Notes, 12.000% due 4/15/03................ 179,600
225,000 B- Verio Inc., Sr. Notes, 11.250% due 12/1/08.................. 227,250
Viasystems Group, Sr. Sub. Notes:
120,000 B- 9.750% due 6/1/07........................................... 114,000
310,000 B- Series B 9.750% due 6/1/07.................................. 294,500
- --------------------------------------------------------------------------------------------------
1,231,330
- --------------------------------------------------------------------------------------------------
MANUFACTURING -- 9.3%
Advance Holding Corp.:
60,000 B- Step bond to yield 12.645% due 4/15/09...................... 35,400
300,000 NR Step bond to yield 12.818% due 4/15/09 (a).................. 177,000
240,000 B+ Diamond Triumph Autoglass, Sr. Notes, 9.250% due 4/1/08..... 238,200
400,000 B- Doane Pet Care Co., Sr. Sub. Notes, 9.750% due 5/15/07...... 410,000
400,000 B- Fisher Scientific International Inc., Sr. Sub. Notes, 9.000%
due 2/1/08................................................ 400,000
120,000 BB- Imax Corp., Sr. Notes, 7.875% due 12/1/05................... 121,200
300,000 B- Roller Bearing Co., Company Guaranteed, 9.625% due
6/15/07................................................... 288,000
180,000 B- Special Devices Inc., Sr. Sub. Notes, 11.375% due 12/15/08
(a)....................................................... 183,150
50,000 B- Sullivan Graphics Inc., Sr. Sub. Notes, 12.750% due
8/1/05.................................................... 51,000
250,000 B- Transdigm Inc., Sr. Sub. Notes, 10.375% due 12/1/08......... 250,625
410,000 B WHX Corp., Sr. Notes, 10.500% due 4/15/05................... 377,200
- --------------------------------------------------------------------------------------------------
2,531,775
- --------------------------------------------------------------------------------------------------
MEDIA/ENTERTAINMENT -- 15.1%
500,000 B Chancellor Media Corp., Sr. Sub. Notes, 9.000% due
10/1/08................................................... 531,250
100,000 B- Classic Cable Inc., Sr. Sub. Notes, 9.875% due 8/1/08....... 104,250
500,000 B Jacor Communication Co., Company Guaranteed, 9.750% due
12/15/06.................................................. 555,000
340,000 CCC+ Paxson Communication Corp., Sr. Sub. Notes, 11.625% due
10/1/02................................................... 345,100
Pegasus Media & Communication Corp.:
500,000 B- Notes 12.500% due 7/1/05.................................... 550,000
330,000 B- Sr. Notes, 9.625% due 10/15/05.............................. 330,000
595,000 B- SFX Entertainment Inc., Company Guaranteed, 9.125% due
2/1/08.................................................... 593,515
175,000 B Sinclair Broadcast Group Inc., Sr. Sub. Notes, 8.750% due
12/15/07.................................................. 176,750
645,000 B+ TeleWest Communications PLC, step bond to yield 10.809% due
10/1/07................................................... 538,575
200,000 B- Transwestern Publishing Co., Sr. Sub. Notes, 9.625% due
11/15/07.................................................. 208,750
340,000 B United International Holdings Inc., step bond to yield
10.767% due 2/15/08....................................... 183,600
- --------------------------------------------------------------------------------------------------
4,116,790
- --------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
18
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
HIGH YIELD BOND TRUST
<TABLE>
<C> <S> <C> <C>
METALS/MINERALS -- 7.4%
$ 500,000 B- Diamond Holdings PLC, Company Guaranteed, 9.125% due
2/1/08.................................................... $ 477,500
500,000 BB Great Central Mines Ltd., Sr. Notes, 8.875% due 4/1/08...... 497,500
450,000 B- La Petite Acadamy Inc., Company Guaranteed, 10.000% due
5/15/08................................................... 445,500
600,000 CCC+ Republic Engineer Steel, 1st Mortgage, 9.875% due
12/15/01.................................................. 616,500
- --------------------------------------------------------------------------------------------------
2,037,000
- --------------------------------------------------------------------------------------------------
PAPER -- 1.5%
400,000 B Mail-Well Corp., Sr. Sub. Notes, 10.500% due 2/15/04........ 421,000
- --------------------------------------------------------------------------------------------------
RETAIL -- 3.4%
410,000 B- Advance Stores Co. Inc., Sr. Sub. Notes, 10.250% due 4/15/08
(a)....................................................... 416,150
500,000 BB K-Mart Corp., Medium Term Notes, 7.900% due 12/14/00........ 508,750
- --------------------------------------------------------------------------------------------------
924,900
- --------------------------------------------------------------------------------------------------
SERVICES -- 6.9%
710,000 B AFC Enterprises, Sr. Sub. Notes, 10.250% due 5/15/07........ 741,950
250,000 B+ Equimar Shipholdings Ltd., Company Guaranteed, 9.875% due
7/1/07.................................................... 197,500
236,896 B FRD Acquisition, Sr. Notes, 12.500% due 7/15/04............. 241,634
450,000 B NE Restaurant Co. Inc., Sr. Notes, 10.750% due 7/15/08...... 456,750
240,000 B- Williams Scotsman Inc., Company Guaranteed, 9.875% due
6/1/07.................................................... 249,900
- --------------------------------------------------------------------------------------------------
1,887,734
- --------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS -- 7.0%
295,000 CCC+ Centennial Cellular Corp., Sr. Sub. Notes, 10.750% due
12/15/08 (a).............................................. 297,213
250,000 B- Classic Communications, Inc., step bond to yield 13.055% due
8/1/09.................................................... 151,875
260,000 B+ Jordan Telecommunications Products, step bond to yield
10.629% due 8/1/07........................................ 200,200
NTL Inc.:
120,000 B- Sr. Notes, 11.500% due 10/1/08 (a).......................... 131,100
585,000 B- Step bond to yield 10.095% due 4/1/08....................... 356,850
400,000 BB+ Qwest Communication Corp., step bond to yield 7.608% due
2/1/08.................................................... 301,000
485,000 B- T/SF Communications Corp., Company Guaranteed, 10.375% due
11/1/07................................................... 483,181
- --------------------------------------------------------------------------------------------------
1,921,419
- --------------------------------------------------------------------------------------------------
TEXTILES -- 3.8%
550,000 B+ Avondale Mills Inc., Company Guaranteed, 10.250% due
5/1/06.................................................... 577,500
475,000 B+ Delta Mills Inc., Company Guaranteed, 9.625% due 9/1/07..... 467,875
- --------------------------------------------------------------------------------------------------
1,045,375
- --------------------------------------------------------------------------------------------------
TRANSPORTATION -- 2.7%
474,000 B- Atlas Air Inc., Sr. Notes, 10.750% due 8/1/05............... 500,070
240,000 B- MTL Inc., Sr. Sub. Notes, 10.000% due 6/15/06 (a)........... 232,800
- --------------------------------------------------------------------------------------------------
732,870
- --------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS AND NOTES (Cost -- $24,656,253)....... 24,389,267
- --------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- --------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
STOCK -- 3.6%
- --------------------------------------------------------------------------------------------------
ENERGY -- 0.2%
3,100 Niagara Mohawk Power Corp. ................................. 49,987
- --------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
19
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
HIGH YIELD BOND TRUST
<TABLE>
<C> <S> <C> <C>
MEDIA/ENTERTAINMENT -- 0.2%
10 Paxson Communications Corp., Preferred, Payment-in-kind,
Exchangeable 12.500%...................................... $ 875
451 SFX Broadcasting Inc., Class A Shares, Preferred, 12.625%... 55,924
- --------------------------------------------------------------------------------------------------
56,799
- --------------------------------------------------------------------------------------------------
TECHNOLOGY -- 1.3%
4,500 Eagle-Picher Holdings, Preferred, 11.750%, Expire 3/1/08.... 220,500
71 Source Media Inc., Preferred, Payment-in-kind, Exchangeable
13.500%................................................... 1,385
9,000 Viasystems Group, Inc., Preferred, Series B................. 135,000
- --------------------------------------------------------------------------------------------------
356,885
- --------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS -- 1.9%
300,000 Centaur Funding Corp., Preferred 9.080% (a)................. 309,060
2,100 Global Crossing Holding Ltd., Preferred 10.500% (a)......... 204,750
- --------------------------------------------------------------------------------------------------
513,810
- --------------------------------------------------------------------------------------------------
TOTAL STOCK (Cost -- $650,251).............................. 977,481
- --------------------------------------------------------------------------------------------------
WARRANTS (B) -- 0.1%
- --------------------------------------------------------------------------------------------------
MANUFACTURING -- 0.1%
1,600 Terex Corp., Expire 5/15/02................................. 32,000
- --------------------------------------------------------------------------------------------------
METAL PRODUCTS -- 0.0%
500 Gulf State Steel Alabama Inc., Expire 4/15/03............... 5
- --------------------------------------------------------------------------------------------------
TOTAL WARRANTS (Cost -- $44,163)............................ 32,005
- --------------------------------------------------------------------------------------------------
SUB-TOTAL INVESTMENTS (Cost -- $25,350,667)................. 25,398,753
- --------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
- --------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
REPURCHASE AGREEMENT -- 7.1%
$1,936,000 Morgan Stanley, Dean Witter & Co., 4.620% due 1/4/99,
Proceeds at Maturity -- $1,936,992 (Fully collaterized by
U.S. Treasury Notes, 13.875% due 5/15/11; Market
Value -- $1,979,923) (Cost -- $1,936,000)................... 1,936,000
- --------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100% (Cost -- $27,286,667**)........... $27,334,753
- --------------------------------------------------------------------------------------------------
</TABLE>
+ All ratings are by Standard & Poor's Ratings Services, except that those
identified by an asterisk (*) are rated by Moody's Investors Service Inc.
(a) Security is exempt from registration under rule 144A of the Securities Act
of 1933. This security may be sold in transactions that are exempt from
registration, normally to qualified institutional buyers.
(b) Non-income producing security.
** Aggregate cost for Federal income tax purposes is substantially the same.
See page 22 for definition of bond ratings.
SEE NOTES TO FINANCIAL STATEMENTS.
20
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
HIGH YIELD BOND TRUST
SUMMARY OF BONDS BY COMBINED RATINGS
<TABLE>
<CAPTION>
STANDARD & % OF TOTAL CORPORATE
MOODY'S AND/OR POOR'S BONDS & NOTES
<S> <C> <C> <C>
- -------------------------------------------------
Ba BB 13.1%
B B 81.0
Caa CCC 5.2
NR NR 0.7
- -------------------------------------------------
100.0%
- -------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
21
<PAGE>
- --------------------------------------------------------------------------------
BOND RATINGS (UNAUDITED)
The definitions of the applicable rating symbols are set forth below:
Standard & Poor's Ratings Services ("Standard & Poor's") -- Ratings from "AA" to
"C" may be modified by the addition of a plus (+) or a minus (-) sign to show
relative standings within the major rating categories.
<TABLE>
<S> <C> <C>
AAA -- Bonds rated "AAA" has the highest rating assigned by
Standard & Poor's. Capacity to pay interest and repay
principal is extremely strong.
AA -- Bonds rated "AA" has a very strong capacity to pay interest
and repay principal and differs from the highest rated issue
only in a small degree.
A -- Bonds rated "A" has a strong capacity to pay interest and
repay principal although it is somewhat more susceptible to
the adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories.
BBB -- Bonds rated "BBB" are regarded as having an adequate
capacity to pay interest and repay principal. Whereas they
normally exhibit adequate protection parameters, adverse
economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and
repay principal for bonds in this category than for bonds in
higher rated categories.
BB, B -- Bonds rated "BB" and "B" are regarded, on balance, as
and CCC predominantly speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of
the obligation. "BB" represents a lower degree of
speculation than "B", and "CCC" the highest degree of
speculation. While such bonds will likely have some quality
and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse
conditions.
C -- The rating "C" is reserved for income bonds on which no
interest is being paid.
D -- Bonds rated "D" are in default, and payment of interest
and/or repayment of principal is in arrears.
</TABLE>
Moody's Investors Service Inc. ("Moody's") -- Numerical modifiers 1, 2, and 3
may be applied to each generic rating from "Aa" to "C", where 1 is the highest
and 3 the lowest rating within its generic category.
<TABLE>
<S> <C> <C>
Aaa -- Bonds rated "Aaa" are judged to be of the best quality. They
carry the smallest degree of investment fisk and are
generally referred to as "gilt edge." Interest payments are
protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective
elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally
strong position of such issues.
Aa -- Bonds rated "Aa" are judged to be of high quality by all
standards. Together with the "Aaa" group they comprise what
are generally known as high grade bonds. They are rated
lower than the best bonds because margins of protection may
not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may
be other elements present which make the long-term risks
appear somewhat larger than in "Aaa" securities.
A -- Bonds rated "A" possess many favorable investment attributes
and are to be considered as upper medium grade obligations.
Factors giving security to principal and interest are
considered adequate but elements may be present which
suggest a susceptibility to impairment some time in the
future.
Baa -- Bonds rated "Baa" are considered to be medium grade
obligations; that is, they are neither highly protected nor
poorly secured. Interest payment and principal security
appear adequate for the present but certain protective
elements may be lacking or may be characteristically
unreliable over any great length of time. These bonds lack
outstanding investment characteristics and may have
speculative characteristics as well.
Ba -- Bonds rated "Ba" are judged to have speculative elements;
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very
moderate and thereby not well safeguarded during both good
and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds rated "B" generally lack characteristics of desirable
investments. Assurance of interest and principal payments or
of maintenance of other terms of the contract over any long
period of time may be small.
Caa -- Bonds rated "Caa" are of poor standing. These issues may be
in default, or present elements of danger may exist with
respect to principal or interest.
Ca -- Bonds rated "Ca" represent obligations which are speculative
in a high degree. Such issues are often in default or have
other marked shortcomings.
C -- Bonds rated "C" are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
NR -- Indicates that the bond is not rated by Standard & Poor's or
Moody's.
</TABLE>
22
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
CAPITAL APPRECIATION FUND
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- ----------------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCK -- 88.3%
- ----------------------------------------------------------------------------------------
BANKING -- 0.4%
87,855 U.S. Bancorp................................................ $ 3,118,853
- ----------------------------------------------------------------------------------------
BEVERAGE -- 2.1%
206,960 Coca-Cola Co. .............................................. 13,840,450
135,965 Coca-Cola Enterprises Inc. ................................. 4,860,749
- ----------------------------------------------------------------------------------------
18,701,199
- ----------------------------------------------------------------------------------------
CHEMICAL -- 0.7%
134,205 Monsanto Co. ............................................... 6,374,738
- ----------------------------------------------------------------------------------------
COMPUTERS -- 12.4%
805,720 Dell Computer Corp. (a)..................................... 58,968,632
137,050 International Business Machines Corp. ...................... 25,319,988
428,380 VERITAS Software Corp. (a).................................. 25,676,026
- ----------------------------------------------------------------------------------------
109,964,646
- ----------------------------------------------------------------------------------------
COMMUNICATIONS -- 0.9%
160,645 Qwest Communications International, Inc. (a)................ 8,032,250
- ----------------------------------------------------------------------------------------
DIVERSIFIED OPERATIONS -- 8.9%
361,405 General Electric Co. ....................................... 36,885,898
676,170 Time Warner Inc. ........................................... 41,964,801
- ----------------------------------------------------------------------------------------
78,850,699
- ----------------------------------------------------------------------------------------
DRUGS AND HEALTH CARE -- 10.8%
318,020 Eli Lilly & Co. ............................................ 28,264,028
19,350 MedImmune, Inc. (a)......................................... 1,924,116
271,190 Pfizer, Inc. ............................................... 34,017,396
430,125 Warner-Lambert Co. ......................................... 32,340,023
- ----------------------------------------------------------------------------------------
96,545,563
- ----------------------------------------------------------------------------------------
ELECTRONICS -- 3.1%
323,376 Texas Instruments Inc. ..................................... 27,668,773
- ----------------------------------------------------------------------------------------
FINANCIAL SERVICES -- 4.5%
363,735 Charles Schwab Corp. ....................................... 20,437,360
265,520 Fannie Mae.................................................. 19,648,480
- ----------------------------------------------------------------------------------------
40,085,840
- ----------------------------------------------------------------------------------------
MEDICAL INFORMATION SYSTEMS -- 3.6%
428,381 IMS Health Inc. ............................................ 32,315,916
- ----------------------------------------------------------------------------------------
RETAIL -- 7.7%
239,105 Costco Cos., Inc. (a)....................................... 17,260,392
309,250 Fred Meyer, Inc. (a)........................................ 18,632,312
216,395 Safeway Inc. (a)............................................ 13,186,570
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
23
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
CAPITAL APPRECIATION FUND
<TABLE>
219,850 Staples, Inc. (a). $ 9,604,697
157,830 Home Depot, Inc. ........................................... 9,657,223
- ----------------------------------------------------------------------------------------
68,341,194
- ----------------------------------------------------------------------------------------
SOFTWARE -- 21.7%
566,180 America Online, Inc. (a).................................... 90,588,800
508,245 Cisco Systems, Inc. (a)..................................... 47,171,489
104,290 Intuit Inc. (a)............................................. 7,561,025
204,090 J.D. Edwards & Co. (a)...................................... 5,791,054
304,900 Microsoft Corp. (a)......................................... 42,285,819
- ----------------------------------------------------------------------------------------
193,398,187
- ----------------------------------------------------------------------------------------
TELECOMMUNICATIONS -- 11.5%
127,820 Global TeleSystems Group, Inc. (a).......................... 7,125,965
218,710 Lucent Technologies Inc. ................................... 24,058,100
366,195 MCI WorldCom, Inc. (a)...................................... 26,274,491
369,520 Nokia Corp. Sponsored ADR................................... 44,504,065
- ----------------------------------------------------------------------------------------
101,962,621
- ----------------------------------------------------------------------------------------
TOTAL COMMON STOCK (Cost -- $420,182,280)................... 785,360,479
- ----------------------------------------------------------------------------------------
FOREIGN STOCK -- 1.3%
DRUGS AND HEALTH CARE -- 1.3%
848,713 Smithkline Beecham PLC (Cost -- $11,889,340)................ 11,911,042
- ----------------------------------------------------------------------------------------
SUB-TOTAL INVESTMENTS (Cost -- $432,071,620)................ 797,271,521
- ----------------------------------------------------------------------------------------
FACE
AMOUNT SECURITY VALUE
- ----------------------------------------------------------------------------------------
<C> <S> <C>
REPURCHASE AGREEMENT -- 10.4%
$92,708,000 Morgan Stanley, Dean Witter & Co., 4.620% due 1/4/99;
Proceeds at maturity -- $92,755,586; (Fully Collateralized
by U.S. Treasury Notes, 7.125% to 8.750% due 8/15/20 to
2/15/23; Market
Value -- $94,531,419)(Cost -- $92,708,000).................. 92,708,000
- ----------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100% (Cost -- $524,779,620**).......... $889,979,521
- ----------------------------------------------------------------------------------------
</TABLE>
(a) Non-income producing security.
** Aggregate cost for Federal income tax purposes is substantially the same.
SEE NOTES TO FINANCIAL STATEMENTS.
24
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
FACE ANNUALIZED
AMOUNT SECURITY YIELD VALUE
- --------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
COMMERCIAL PAPER -- 99.0%
$2,000,000 AC Acquisition Holdings matures 3/12/99..................... 5.10% $ 1,980,439
2,000,000 Asset Securitization Corp. matures 2/18/99.................. 5.35 1,985,947
2,200,000 Associates Corp. of North America matures 1/12/99........... 5.18 2,196,545
2,100,000 Bayer Corp. matures 2/25/99................................. 5.10 2,083,798
2,200,000 Becton Dickinson & Co. matures 1/19/99...................... 5.32 2,194,203
2,000,000 Campbell Soup Co. matures 1/8/99............................ 5.22 1,997,978
1,530,000 Coca-Cola Co. matures 2/4/99................................ 5.13 1,522,645
2,000,000 Eastman Kodak matures 1/27/99............................... 5.17 1,992,590
2,000,000 Eaton Corp. matures 1/6/99.................................. 6.03 1,998,328
1,650,000 E.I. Dupont de Nemours matures 1/14/99...................... 5.06 1,647,020
2,000,000 Ford Motor Credit Corp. matures 1/8/99...................... 5.44 1,997,896
1,125,000 General Electric Capital Corp. matures 1/13/99.............. 5.37 1,123,005
1,000,000 H.J. Heinz Co. matures 2/2/99............................... 5.21 995,404
1,900,000 Household Finance Corp. matures 1/11/99..................... 5.39 1,897,171
1,750,000 Johnson & Johnson matures 1/4/99............................ 5.00 1,749,271
2,150,000 Marsh & McLennan Co. Inc. matures 1/28/99................... 5.15 2,141,809
2,100,000 National Rural Utilities matures 1/15/99.................... 5.06 2,095,917
1,995,000 Paccar Financial Corp. matures 1/21/99...................... 5.23 1,989,237
2,100,000 Prudential Funding Co. matures 2/5/99....................... 5.27 2,089,383
2,000,000 Teco Finance Inc. matures 2/5/99............................ 5.16 1,990,044
1,850,000 TRW Inc. matures 1/28/99.................................... 5.23 1,842,813
2,250,000 Walt Disney Co. matures 3/2/99.............................. 5.16 2,230,950
- --------------------------------------------------------------------------------------------------------------
TOTAL COMMERCIAL PAPER (Cost -- $41,742,393) 41,742,393
- --------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT -- 1.0%
430,000 CS First Boston Corp., 4.400% due 1/4/99; Proceeds at
Maturity -- $430,210; (Fully Collateralized by U.S. Treasury
Notes, 5.375% due 1/31/00; Market Value -- $438,780)
(Cost -- $430,000).......................................... 430,000
- --------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100% (Cost -- $42,172,393*)............ $42,172,393
- --------------------------------------------------------------------------------------------------------------
</TABLE>
* Aggregate cost for Federal income tax purposes is substantially the same.
SEE NOTES TO FINANCIAL STATEMENTS.
25
<PAGE>
- --------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES DECEMBER 31, 1998
<TABLE>
<CAPTION>
MANAGED HIGH YIELD CAPITAL MONEY
ASSETS BOND APPRECIATION MARKET
TRUST TRUST FUND PORTFOLIO
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS:
Investments -- Cost.............................. $201,477,500 $25,350,667 $432,071,620 $41,742,393
Repurchase Agreements -- Cost.................... 1,741,000 1,936,000 92,708,000 430,000
- ------------------------------------------------------------------------------------------------------------
Investments, at value............................ $273,592,684 $25,398,753 $797,271,521 $41,742,393
Repurchase Agreements, at value.................. 1,741,000 1,936,000 92,708,000 430,000
Cash............................................. 520 -- 331 252
Dividends and interest receivable................ 984,220 586,988 174,941 56
Receivable for securities sold................... 165,698 252 -- --
Receivable for Fund shares sold.................. -- 232,889 1,340,964 --
- ------------------------------------------------------------------------------------------------------------
TOTAL ASSETS..................................... 276,484,122 28,154,882 891,495,757 42,172,701
- ------------------------------------------------------------------------------------------------------------
LIABILITIES:
Investment advisory fees payable................. 113,433 12,014 510,482 8,632
Administration fees payable...................... 13,651 1,442 40,362 2,136
Payable to bank.................................. -- 34,095 -- --
Payable for Fund shares purchased................ 62,457 -- -- --
Payable to broker -- variation margin............ 35,700 -- -- --
Dividends payable................................ -- -- -- 74,245
Accrued expenses................................. 77,207 18,890 83,990 18,359
- ------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES................................ 302,448 66,441 634,834 103,372
- ------------------------------------------------------------------------------------------------------------
TOTAL NET ASSETS................................... $276,181,674 $28,088,441 $890,860,923 $42,069,329
- ------------------------------------------------------------------------------------------------------------
NET ASSETS:
Paid-in capital.................................. $181,377,818 $27,358,407 $494,472,555 $42,069,329
Undistributed net investment income.............. 5,732,244 2,318,362 1,059,153 --
Accumulated net realized gain (loss) from
security transactions, foreign currencies and
futures contracts............................. 17,799,372 (1,636,414) 30,123,306 --
Net unrealized appreciation of investments,
futures contracts and foreign currencies...... 71,272,240 48,086 365,205,909 --
- ------------------------------------------------------------------------------------------------------------
TOTAL NET ASSETS................................... $276,181,674 $28,088,441 $890,860,923 $42,069,329
- ------------------------------------------------------------------------------------------------------------
SHARES OUTSTANDING................................. 13,812,401 2,850,740 12,246,916 42,069,329
- ------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, PER SHARE......................... $19.99 $9.85 $72.74 $1.00
- ------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
26
<PAGE>
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
MANAGED HIGH YIELD CAPITAL MONEY
ASSETS BOND APPRECIATION MARKET
TRUST TRUST FUND PORTFOLIO
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest............................................ $ 4,703,240 $ 2,568,670 $ 3,117,890 $1,637,680
Dividends........................................... 2,454,616 46,514 2,898,344 --
Less: Foreign withholding tax....................... (4,526) -- (26,918) --
- -------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT INCOME............................. 7,153,330 2,615,184 5,989,316 1,637,680
- -------------------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 3)................... 1,232,882 141,393 4,360,310 96,335
Administration fees (Note 3)........................ 147,946 16,967 380,360 19,629
Audit and legal..................................... 41,953 35,597 46,643 29,000
Shareholder communications.......................... 21,348 10,984 76,697 6,746
Custody............................................. 18,000 7,912 40,154 9,269
Shareholder and system servicing fees............... 5,113 18,586 10,665 10,114
Trustees' fees...................................... 1,000 1,000 6,091 3,288
Other............................................... 3,196 378 5,748 3,288
- -------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES...................................... 1,471,438 232,817 4,926,668 177,669
- -------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME................................. 5,681,892 2,382,367 1,062,648 1,460,011
- -------------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS,
FUTURES CONTRACTS AND FOREIGN CURRENCIES (NOTES 4 AND
6):
Realized Gain (Loss) From:
Security transactions (excluding short-term
securities*)................................... 19,805,812 443,848 31,708,067 (215)
Futures contracts................................ (1,800,903) -- -- --
Foreign currency transactions.................... -- -- (3,495) --
- -------------------------------------------------------------------------------------------------------------
NET REALIZED GAIN (LOSS)............................ 18,004,909 443,848 31,704,572 (215)
- -------------------------------------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of
Investments, Futures Contracts and Foreign
Currencies:
Beginning of year................................ 46,559,403 1,143,573 96,460,219 --
End of year...................................... 71,272,240 48,086 365,205,909 --
- -------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET UNREALIZED
APPRECIATION........................................ 24,712,837 (1,095,487) 268,745,690 --
- -------------------------------------------------------------------------------------------------------------
NET GAIN (LOSS) ON INVESTMENTS, FUTURES CONTRACTS AND
FOREIGN CURRENCIES.................................. 42,717,746 (651,639) 300,450,262 (215)
- -------------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM OPERATIONS................ $48,399,638 $ 1,730,728 $301,512,910 $1,459,796
- -------------------------------------------------------------------------------------------------------------
</TABLE>
* Except for Money Market Portfolio where the net realized losses are only from
the sale of short-term securities.
SEE NOTES TO FINANCIAL STATEMENTS.
27
<PAGE>
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
MANAGED HIGH YIELD CAPITAL MONEY
ASSETS BOND APPRECIATION MARKET
TRUST TRUST FUND PORTFOLIO
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income............................ $ 5,681,892 $ 2,382,367 $ 1,062,648 $ 1,460,011
Net realized gain (loss)......................... 18,004,909 443,848 31,704,572 (215)
Increase (decrease) in net unrealized
appreciation.................................. 24,712,837 (1,095,487) 268,745,690 --
- -------------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM OPERATIONS........... 48,399,638 1,730,728 301,512,910 1,459,796
- -------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM (NOTE 2):
Net investment income............................ (6,031,526) (1,906,452) (1,757,481) (1,459,796)
Net realized gains............................... (11,032,250) -- (15,276,070) --
- -------------------------------------------------------------------------------------------------------------
DECREASE IN NET ASSETS FROM
DISTRIBUTIONS TO SHAREHOLDERS................. (17,063,776) (1,906,452) (17,033,551) (1,459,796)
- -------------------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 11):
Net proceeds from sale of shares................. 17,716,235 7,689,311 206,554,463 103,475,184
Net asset value of shares issued for reinvestment
of dividends.................................. 17,063,776 1,906,452 17,033,551 1,409,254
Cost of shares reacquired........................ (13,804,479) (6,603,776) (24,907,667) (76,308,910)
- -------------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM FUND SHARE
TRANSACTIONS.................................. 20,975,532 2,991,987 198,680,347 28,575,528
- -------------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS............................. 52,311,394 2,816,263 483,159,706 28,575,528
NET ASSETS:
Beginning of year................................ 223,870,280 25,272,178 407,701,217 13,493,801
- -------------------------------------------------------------------------------------------------------------
END OF YEAR*..................................... $276,181,674 $28,088,441 $890,860,923 $ 42,069,329
- -------------------------------------------------------------------------------------------------------------
* Includes undistributed net investment income
of:.............................................. $5,732,244 $2,318,362 $1,059,153 --
- -------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
28
<PAGE>
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED) FOR THE YEAR ENDED DECEMBER
31, 1997
<TABLE>
<CAPTION>
MANAGED HIGH YIELD CAPITAL MONEY
ASSETS BOND APPRECIATION MARKET
TRUST TRUST FUND PORTFOLIO
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income............................ $ 6,035,045 $ 1,906,327 $ 1,757,481 $ 305,468
Net realized gain (loss)......................... 12,928,663 813,430 14,695,393 (72)
Increase in net unrealized appreciation.......... 20,882,409 485,471 50,761,528 --
- -------------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM OPERATIONS........... 39,846,117 3,205,228 67,214,402 305,396
- -------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM (NOTE 2):
Net investment income............................ (1,469,979) (15,738) -- (305,378)
Net realized gains............................... (4,813,889) -- (2,626) --
- -------------------------------------------------------------------------------------------------------------
DECREASE IN NET ASSETS FROM DISTRIBUTIONS TO
SHAREHOLDERS.................................. (6,283,868) (15,738) (2,626) (305,378)
- -------------------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 11):
Net proceeds from sale of shares................. 7,217,202 7,500,172 143,131,359 28,240,251
Net asset value of shares issued for reinvestment
of dividends.................................. 6,283,868 15,738 2,626 286,879
Cost of shares reacquired........................ (11,803,520) (2,724,265) (26,776,295) (18,576,002)
- -------------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM FUND SHARE
TRANSACTIONS.................................. 1,697,550 4,791,645 116,357,690 9,951,128
- -------------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS............................. 35,259,799 7,981,135 183,569,466 9,951,146
NET ASSETS:
Beginning of year................................ 188,610,481 17,291,043 224,131,751 3,542,655
- -------------------------------------------------------------------------------------------------------------
END OF YEAR*..................................... $223,870,280 $25,272,178 $407,701,217 $ 13,493,801
- -------------------------------------------------------------------------------------------------------------
* Includes undistributed net investment income
of: ............................................. $6,032,308 $1,906,327 $1,757,481 --
- -------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
29
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
The Managed Assets Trust, High Yield Bond Trust, Capital Appreciation Fund
and Money Market Portfolio (formerly known as the Cash Income Trust)
(collectively, "Fund(s)") are each a Massachusetts business trust registered
under the Investment Company Act of 1940, as amended, as a diversified, open-end
management investment companies. Shares of the Funds are offered only to
insurance company separate accounts that fund certain variable annuity and
variable life insurance contracts.
The significant accounting policies consistently followed by the Funds are:
(a) security transactions are accounted for on trade date; (b) securities traded
on national securities markets are valued at the closing prices on such markets;
securities for which no sales price were reported and U.S. government and agency
obligations are valued at the mean between the last reported bid and asked
prices or on the basis of quotations received from reputable brokers or other
recognized sources; (c) securities for which market quotations are not available
will be valued in good faith at fair value by or under the direction of the
Board of Trustees; (d) securities maturing within 60 days are valued at cost
plus accreted discount, or minus amortized premium, which approximates value;
(e) securities that have a maturity of 60 days or more are valued at prices
based on market quotations for securities of similar type, yield and maturity;
(f) interest income, adjusted for amortization of premium and accretion of
discount, is recorded on the accrual basis and dividend income is recorded on
the ex-dividend date; foreign dividends are recorded on the ex-dividend date or
as soon as practical after the Fund determines the existence of a dividend
declaration after exercising reasonable due diligence; (g) gains or losses on
the sale of securities are calculated by using the specific identification
method; (h) dividends and distributions to shareholders are recorded on the
ex-dividend date; (i) the accounting records of the Fund are maintained in U.S.
dollars. All assets and liabilities denominated in foreign currencies are
translated into U.S. dollars on the date of valuation. Purchases and sales of
securities and income and expenses are translated at the rate of exchange quoted
on the respective date that such transactions are recorded. Differences between
income and expense amounts recorded and collected or paid are adjusted when
reported by the custodian; (j) the character of income and gains to be
distributed are determined in accordance with income tax regulations which may
differ from generally accepted accounting principles. At December 31, 1998,
reclassifications were made to the capital accounts of the Managed Assets Trust,
High Yield Bond Trust and Capital Appreciation Fund to reflect permanent
book/tax differences and income and gains available for distributions under
income tax regulations. Accordingly, for the Managed Assets Trust, a portion of
undistributed net investment income amounting to $116 and a portion of
accumulated net realized gains amounting to $31,374 was reclassified to paid-in
capital. In addition, for the High Yield Bond Trust, a portion of accumulated
net realized loss amounting to $1,352,578 was reclassified to paid-in capital.
Net investment income, net realized gains and net assets were not affected by
this change; (k) the Funds intend to comply with the requirements of the
Internal Revenue Code of 1986, as amended, pertaining to regulated investment
companies and to make distributions of taxable income sufficient to relieve it
from substantially all Federal income and excise taxes; and (l) estimates and
assumptions are required to be made regarding assets, liabilities and changes in
net assets resulting from operations when financial statements are prepared.
Changes in the economic environment, financial markets and any other parameters
used in determining these estimates could cause actual results to differ.
2. DIVIDENDS
Money Market Portfolio declares and records a dividend of substantially all
of its net investment income on each business day. Such dividends are paid or
reinvested on the payable date.
3. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS
Travelers Asset Management International Corporation ("TAMIC"), an indirect
wholly owned subsidiary of Citigroup, Inc., acts as investment manager and
advisor to the Managed Assets Trust ("MAT"), High Yield Bond Trust ("HYBT"),
Capital Appreciation Fund ("CAF") and Money Market Portfolio ("MMP"). MAT, CAF
and MMP pay TAMIC an investment management and advisory fee calculated at the
annual rate of 0.50%, 0.75% and 0.3233%, respectively of its average daily net
assets. HYBT pays TAMIC an investment management and advisory fee calculated at
an annual rate of 0.50% on the first $50,000,000, 0.40% on the next
$100,000,000, 0.30% on the next $100,000,000 and 0.25% on the amount over
$250,000,000 of its average daily net assets. This fee is calculated daily and
paid monthly.
TAMIC has a sub-advisory agreement with The Travelers Investment Management
Company, Inc. ("TIMCO"), an indirect wholly owned subsidiary of Citigroup, Inc.
Pursuant to the sub-advisory agreement, TIMCO is responsible for the day-to-day
portfolio operations and investment decisions for MAT. As a result, TAMIC pays
TIMCO, as sub-advisor, 0.25% of the average daily net assets of MAT.
30
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
TAMIC also has a sub-advisory agreement with Janus Capital Corporation
("Janus"). Pursuant to the sub-advisory agreement, Janus is responsible for the
day-to-day portfolio operations and investment decisions for CAF. As a result,
TAMIC pays Janus, as sub-advisor, 0.55% of the average daily net assets of CAF.
Travelers Insurance Company ("Travelers Insurance") acts as administrator
to the Funds. The Funds pay Travelers Insurance an administration fee calculated
at an annual rate of 0.06% of its average daily net assets. Travelers Insurance
has entered into a sub-administrative services agreement with Mutual Management
Corp. ("MMC"), a subsidiary of Salomon Smith Barney Holdings Inc. ("SSBH").
Travelers Insurance pays MMC, as sub-administrator, a fee calculated at an
annual rate of 0.06% for the average daily net assets of each Fund. This fee is
calculated daily and paid monthly.
Brokerage commissions of $13,143 were received from affiliated brokers.
One Trustee and all officers of the Funds are employees of Citigroup, Inc.,
or its subsidiaries.
4. INVESTMENTS
During the year ended December 31, 1998, the aggregate cost of purchases
and proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
<TABLE>
<CAPTION>
MANAGED HIGH CAPITAL
ASSETS YIELD BOND APPRECIATION
TRUST TRUST FUND
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Purchases................................................... $190,385,227 $35,792,135 $410,428,204
- -------------------------------------------------------------------------------------------------------
Sales....................................................... 179,263,147 33,175,676 277,800,626
</TABLE>
- --------------------------------------------------------------------------------
At December 31, 1998, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:
<TABLE>
<CAPTION>
MANAGED HIGH CAPITAL
ASSETS YIELD BOND APPRECIATION
TRUST TRUST FUND
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross unrealized appreciation............................... $76,641,813 $ 457,018 $367,626,910
Gross unrealized depreciation............................... (4,526,629) (408,932) (2,427,009)
- -----------------------------------------------------------------------------------------------------
Net unrealized appreciation................................. $72,115,184 $ 48,086 $365,199,901
- -----------------------------------------------------------------------------------------------------
</TABLE>
5. REPURCHASE AGREEMENTS
The Funds purchase (and its custodian takes possession of) U.S. Government
securities from banks and securities dealers subject to agreements to resell the
securities to the sellers at a future date (generally, the next business day) at
an agreed-upon higher repurchase price. The Funds require continual maintenance
of the market value of the collateral in amounts at least equal to the
repurchase price.
6. FUTURES CONTRACTS
Initial margin deposits made upon entering into futures contracts are
recognized as assets. The initial margin is segregated by the custodian and is
noted in the schedule of investments. During the period the futures contract is
open, changes in the value of the contract are recognized as unrealized gains or
losses by "marking-to-market" on a daily basis to reflect the market value of
the contract at the end of each day's trading. Variation margin payments are
made or received and recognized as assets due from or liabilities due to broker,
depending upon whether unrealized gains or losses are incurred. When the
contract is closed, the Funds record a realized gain or loss equal to the
difference between the proceeds from (or cost of) the closing transactions and
the Funds' basis in the contract.
The Funds enter into such contracts to hedge portions of their respective
portfolios. The Funds bear the market risk that arises from changes in the value
of the financial instruments and securities indices (futures contracts).
At December 31, 1998, MAT had sold 42 financial futures contracts on the
Standard & Poor's 500 Index expiring in March 1999. The basis value of such
contracts was $13,920,694. The market value of such contracts on December 31,
1998 was $13,077,750, resulting in an unrealized loss of $842,944.
31
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. OPTIONS CONTRACTS
Premiums paid when put or call options are purchased by the Funds,
represent investments, which are "marked-to-market" daily. When a purchased
option expires, the Funds realize a loss in the amount of the premium paid. When
the Funds enter into closing sales transactions, the Funds realize a gain or
loss depending on whether the proceeds from the closing sales transaction are
greater or less than the premium paid for the option. When the Funds exercise a
put option, it will realize a gain or loss from the sale of the underlying
security and the proceeds from such sale will be decreased by the premium
originally paid. When the Funds exercise a call option, the cost of the security
which the Funds purchase upon exercise will be increased by the premium
originally paid.
At December 31, 1998, the Funds had no open purchased call or put options
contracts.
8. SECURITIES TRADED ON A TO-BE-ANNOUNCED BASIS
The Funds may trade securities on a "to-be-announced" ("TBA") basis. In a
TBA transaction, the Funds commit to purchasing or selling securities for which
specific information is not yet known at the time of the trade, particularly the
face amount and maturity date in GNMA/FNMA transactions. Securities purchased on
a TBA basis are not settled until they are delivered to the Funds, normally 15
to 45 days later. These transactions are subject to market fluctuations and
their current value is determined in the same manner as for other securities.
At December 31, 1998, MAT held no TBA securities.
9. CAPITAL LOSS CARRYFORWARD
At December 31, 1998, HYBT had, for Federal income tax purposes,
approximately $1,311,000 of capital loss carryforwards available to offset
future capital gains. To the extent that these carryforward losses can be used
to offset realized capital gains, it is probable that such gains will not be
distributed. The amount and expiration of the carryforwards are indicated below.
Expiration occurs on December 31 of the year indicated:
<TABLE>
<CAPTION>
1999 2000 2001 2002 2004
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
Carryforward Amounts.......................... $748,000 $48,000 $134,000 $38,000 $343,000
- --------------------------------------------------------------------------------------------------------
</TABLE>
10. FOREIGN SECURITIES
Investing in securities of foreign companies and foreign governments
involves special risks and considerations not typically associated with
investing in U.S. companies and the U.S. Government. These risks include
revaluation of currencies and future adverse political and economic
developments. Moreover, securities of many foreign companies and foreign
governments and their markets may be less liquid and their prices more volatile
than those of securities of comparable U.S. companies and the U.S. Government.
32
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. SHARES OF BENEFICIAL INTEREST
The Declaration of Trust authorizes the issuance of an unlimited number of
shares of beneficial interest without par value. Transactions in shares of each
Fund were as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------
MANAGED ASSETS TRUST
Shares sold................................................. 955,576 430,658
Shares issued on reinvestment............................... 921,867 364,705
Shares redeemed............................................. (747,496) (707,124)
- ---------------------------------------------------------------------------------------------------
Net Increase................................................ 1,129,947 88,239
- ---------------------------------------------------------------------------------------------------
HIGH YIELD BOND TRUST
Shares sold................................................. 772,815 811,252
Shares issued on reinvestment............................... 196,339 1,591
Shares redeemed............................................. (673,313) (294,426)
- ---------------------------------------------------------------------------------------------------
Net Increase................................................ 295,841 518,417
- ---------------------------------------------------------------------------------------------------
CAPITAL APPRECIATION FUND
Shares sold................................................. 3,602,035 3,339,655
Shares issued on reinvestment............................... 292,021 59
Shares redeemed............................................. (448,218) (642,619)
- ---------------------------------------------------------------------------------------------------
Net Increase................................................ 3,445,838 2,697,095
- ---------------------------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO
Shares sold................................................. 103,475,184 28,240,251
Shares issued on reinvestment............................... 1,409,254 286,879
Shares redeemed............................................. (76,308,910) (18,576,002)
- ---------------------------------------------------------------------------------------------------
Net Increase................................................ 28,575,528 9,951,128
- ---------------------------------------------------------------------------------------------------
</TABLE>
33
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
For a share of beneficial interest outstanding throughout each year ended
December 31:
<TABLE>
<CAPTION>
MANAGED ASSETS TRUST 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR............... $17.65 $14.98 $15.50 $12.85 $14.21
- ---------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment income.......................... 0.41 0.48 0.46 0.49 0.46
Net realized and unrealized gain (loss)........ 3.27 2.70 1.50 2.83 (0.73)
- ---------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations.............. 3.68 3.18 1.96 3.32 (0.27)
- ---------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM (1):
Net investment income.......................... (0.47) (0.12) (0.89) (0.50) (0.67)
Net realized gains............................. (0.87) (0.39) (1.59) (0.17) (0.42)
- ---------------------------------------------------------------------------------------------------------------
Total Distributions.............................. (1.34) (0.51) (2.48) (0.67) (1.09)
- ---------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR..................... $19.99 $17.65 $14.98 $15.50 $12.85
- ---------------------------------------------------------------------------------------------------------------
TOTAL RETURN..................................... 21.44% 21.31% 13.78% 27.12% (2.24)%
- ---------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000'S).................. $276,182 $223,870 $188,610 $171,276 $140,887
- ---------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses....................................... 0.60% 0.63% 0.58% 0.58% 0.61%
Net investment income.......................... 2.30 2.91 3.51 3.49 3.59
- ---------------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE.......................... 74% 90% 108% 110% 97%
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
HIGH YIELD BOND TRUST 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR............... $9.89 $8.49 $9.00 $8.49 $9.25
- ---------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment income.......................... 0.77 0.76 0.91 0.80 0.66
Net realized and unrealized gain (loss)........ (0.13) 0.65 0.41 0.41 (0.76)
- ---------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations.............. 0.64 1.41 1.32 1.21 (0.10)
- ---------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM (1):
Net investment income.......................... (0.68) (0.01) (1.83) (0.70) (0.66)
- ---------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR..................... $9.85 $9.89 $8.49 $9.00 $8.49
- ---------------------------------------------------------------------------------------------------------------
TOTAL RETURN..................................... 6.56% 16.56% 16.05% 15.47% (1.26)%
- ---------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000'S).................. $28,088 $25,272 $17,291 $12,902 $11,716
- ---------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses (2)................................... 0.82% 0.84% 0.97% 1.25% 1.25%
Net investment income.......................... 8.42 9.04 11.01 9.37 7.71
- ---------------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE.......................... 147% 137% 84% 222% 146%
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Distributions from realized gains include both net realized short-term and
long-term capital gains. Prior to 1996 net realized short-term capital gains
were included in distributions from net investment income.
(2) The ratio of expenses to average net assets reflects an expense
reimbursement by The Travelers in connection with voluntary expense
limitations. Without the expense reimbursement, the ratios of expenses to
average net assets would have been 1.28% and 1.33% for the years ended
December 31, 1995 and 1994, respectively.
34
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
For a share of beneficial interest outstanding throughout each year ended
December 31:
<TABLE>
<CAPTION>
CAPITAL APPRECIATION FUND 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR............ $46.32 $36.72 $33.18 $24.50 $25.87
- ----------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment income....................... 0.06 0.19 0.23 0.24 0.19
Net realized and unrealized gain (loss)..... 28.07 9.41 8.49 8.61 (1.41)
- ----------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations........... 28.13 9.60 8.72 8.85 (1.22)
- ----------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM (1):
Net investment income....................... (0.18) -- (0.41) (0.17) (0.15)
Net realized gains.......................... (1.53) (0.00)* (4.77) -- --
- ----------------------------------------------------------------------------------------------------------------
Total Distributions........................... (1.71) (0.00)* (5.18) (0.17) (0.15)
- ----------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR.................. $72.74 $46.32 $36.72 $33.18 $24.50
- ----------------------------------------------------------------------------------------------------------------
TOTAL RETURN.................................. 61.63% 26.14% 28.21% 36.37% (4.76)%
- ----------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000'S)............... $890,861 $407,701 $224,132 $122,155 $78,494
- ----------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses.................................... 0.85% 0.84% 0.83% 0.85% 0.89%
Net investment income....................... 0.18 0.54 0.69 0.84 0.79
- ----------------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE....................... 53% 89% 84% 124% 106%
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
MONEY MARKET PORTFOLIO 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR.............. $1.00 $1.00 $1.00 $1.00 $1.00
- ----------------------------------------------------------------------------------------------------------------
Net investment income (2)..................... 0.049 0.049 0.0412 0.0417 0.0278
Distributions from net investment income...... (0.049) (0.049) (0.0412) (0.0417) (0.0278)
- ----------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR.................... $1.00 $1.00 $1.00 $1.00 $1.00
- ----------------------------------------------------------------------------------------------------------------
TOTAL RETURN.................................... 5.08% 5.03% 4.20% 4.17% 2.78%
- ----------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000'S)................. $42,069 $13,494 $3,543 $1,417 $1,203
- ----------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses (2)(3)............................... 0.65% 0.57% 0.78% 1.25% 1.25%
Net investment income......................... 5.37 5.03 3.72 -- --
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Distributions from realized gains include both net realized short-term and
long-term capital gains. Prior to 1996 net realized short-term capital gains
were included in distributions from net investment income.
(2) The Travelers reimbursed Money Market Portfolio for $31,300 and $43,376 in
expenses for the years ended December 31, 1997 and December 31, 1996,
respectively. If expenses were not reimbursed, the per share decreases of
net investment income would have been $0.002 and $0.02, respectively, and
the actual expense ratios would have been 1.39% and 1.71%, respectively.
(3) The ratio of expenses to average net assets for 1995 and 1994 reflects an
expense reimbursement by The Travelers in connection with voluntary expense
limitations. Without the expense reimbursement, the ratios of expenses to
average net assets would have been 7.37% and 6.40% for the years ended
December 31, 1995 and 1994, respectively.
* Amount represents less than $0.01 per share.
35
<PAGE>
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
THE SHAREHOLDERS AND BOARDS OF TRUSTEES OF
MANAGED ASSETS TRUST, HIGH YIELD BOND TRUST, CAPITAL APPRECIATION FUND AND MONEY
MARKET PORTFOLIO:
We have audited the accompanying statements of assets and liabilities, including
the schedules of investments, of Managed Assets Trust, High Yield Bond Trust,
Capital Appreciation Fund and Money Market Portfolio as of December 31, 1998,
and the related statements of operations, statements of changes in net assets,
and financial highlights for the year then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits. The statements of changes in net
assets for the year ended December 31, 1996 and the financial highlights for
each of the years in the three year period then ended were audited by other
auditors whose report thereon, dated February 24, 1997, expressed an unqualified
opinion on those financial statements and financial highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1998, by correspondence with the custodian. As to securities
purchased or sold but not yet received or delivered, we performed other
appropriate auditing procedures. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Managed Assets Trust, High Yield Bond Trust, Capital Appreciation Fund and Money
Market Portfolio as of December 31, 1998, their results of their operations,
changes in their net assets and their financial highlights for the year then
ended, in conformity with generally accepted accounting principles.
[KPMG Peat Marwick LLP
Signature]
New York, New York
February 8, 1999
36
<PAGE>
- --------------------------------------------------------------------------------
TAX INFORMATION (UNAUDITED)
For Federal tax purposes the Trust hereby designates for the fiscal year ended
December 31, 1998:
- Percentages of ordinary dividends paid as qualifying for the corporate
dividends received deduction:
<TABLE>
<S> <C>
Managed Assets Trust.............................. 45.24%
Capital Appreciation Fund......................... 100.00
</TABLE>
- Total long-term capital gain distributions paid:
<TABLE>
<S> <C>
Managed Assets Trust.............................. $ 8,710,595
Capital Appreciation Fund......................... 15,276,070
</TABLE>
A total of 12.71% of the ordinary dividends paid by the Managed Assets Trust
from net investment income are derived from Federal obligations and may be
exempt from taxation at the state level.
37
<PAGE>
ANNUAL REPORT FOR THE TRAVELERS SERIES TRUST
- --------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES PORTFOLIO
U.S. Government Securities Portfolio ("Portfolio") seeks to select investments
from the point of view of an investor concerned primarily with highest credit
quality, current income and total return. The assets of the Portfolio will be
invested in direct obligations of the United States, its agencies and
instrumentalities. For the year ended December 31, 1998, the Portfolio had a
total return of 10.20%, which was above its Lipper, Inc. peer group total return
average of 7.36%. (Lipper is an independent fund-tracking organization.)
The key events during 1998 were predominantly mergers and acquisitions, the
ongoing overseas economic crisis and the resiliency of the U.S. economy and
financial markets. The broad range in interest rates and the associated higher
market volatility reflected those conditions. As can be seen from the chart
below, interest rates went down during the reporting period:
YIELDS FROM U.S. TREASURY SECURITIES
<TABLE>
<CAPTION>
12/31/98 12/31/97
-------- --------
<S> <C> <C>
90-day Treasury Bill........................................ 4.45% 5.34%
2-Year Treasury Note........................................ 4.53 5.64
5-Year Treasury Note........................................ 4.54 5.71
10-Year Treasury Bond....................................... 4.65 5.74
30-Year Treasury Bond....................................... 5.09 5.92
</TABLE>
The historically low level of interest rates in October 1998 was precipitated by
the first Federal Reserve Board ("Fed") interest rate cut since 1996. While
further cuts ensued, concerns surrounding hedge fund losses took center stage,
prompting spreads between corporate bonds and mortgage-backed securities to
widen versus U.S. Treasuries. Compounding the problem was considerable corporate
financing as the managers headed toward the end of the year. Corporate debt
issuance for 1998 on a net basis was more than the prior two years combined.
The portfolio managers believe that the dominant issues in 1999 will be the
advent of the Euro, the prospects for economic recovery throughout Asia and
other less developed countries, the future sustainability of U.S. economic
growth and the ongoing resiliency of U.S. financial markets.
The Euro introduces a new variable to macroeconomic analysis that has not been
faced since the demise of the Soviet empire and the advent of true global
competition. Opportunities should abound in the financial markets as corporate
financing expands in creative new ways. However, the implications for the U.S.
dollar as the world's premier currency has now been brought into question by the
Euro's introduction.
The economic picture throughout Asia and Russia remains critically unclear.
Rising employment, the need to dump finished goods in the face of uncertain
currencies and fiscal policies that are slow to change and less than dramatic,
do not bode well for the financial markets of less developed countries.
According to the portfolio managers, the U.S. economy and the financial markets
should continue to soul search as to its prospects for continued good fortune.
The positives include such variables as low unemployment, strong productivity
and the dramatic increase in defined contribution plans (i.e., 401(k) plans) and
estate planning as key market influences. However, historically low savings (the
traditional standard) being redefined as the "wealth effect" as measured by
investment growth remains an ever-present shadow that can change with the ups
and downs of the financial markets.
Technical trends that have supported a decline in interest rates since 1981
remain fully intact. Minor disruptions keep markets range bound between 4.90%
and 5.40% during the first quarter of 1999. However, the portfolio managers
believe the more dominant longer-term force should be for rates to head toward
the 4.50% level. The managers have therefore positioned the Portfolio in the
coming year to benefit from these expected lower interest rates.
38
<PAGE>
ANNUAL REPORT FOR THE TRAVELERS SERIES TRUST
- --------------------------------------------------------------------------------
SOCIAL AWARENESS STOCK PORTFOLIO
The Social Awareness Stock Portfolio ("Portfolio") seeks long-term capital
appreciation and retention of net investment income by selecting investments,
primarily common stocks, that meet the social criteria established for the
Portfolio. The Portfolio's social criteria currently excludes companies that
derive a significant portion of their revenues from the production of tobacco,
tobacco products, alcohol, or military defense related services or gambling
services. For the year ended December 31, 1998, the Portfolio returned 32.27%
and did better than the S&P 500, Index which posted a total return of 28.72%
over the same period.
Last year proved to be both an active and rewarding year for the Portfolio. The
portfolio managers entered 1998 with about $21.0 million in assets, and through
new contributions as well as appreciation they ended the fiscal year with $39.5
million (an increase of almost 88%). They were a net buyer of stock during each
month of the year, investing a net of $10.4 million, and in the process reduced
their starting cash reserves from 11% to 6%. In total, the managers initiated
some 152 individual stock transactions, established 21 new positions, eliminated
14, added to 107 existing holdings and reduced 10.
Throughout this period, the profile of the Portfolio did not change
significantly. The quality grade of the stock holdings remained the same
year-to-year, as did the price volatility characteristic as measured by the
"beta." The dividend yield realized actually rose slightly, while the market's
yield declined. The portfolio managers' sector emphasis, within the stock market
stayed essentially the same, with an above benchmark weighting in the consumer
cyclical, financial, transportation and utility areas. Only the technology
sector dropped out of its beginning over weight status. The biggest change came
in the list of their top ten stock holdings, where only three favorites at the
beginning of the year remained at year end.
As to the future, conventional wisdom says stocks are too expensive. Investors
have realized returns that have been too high for too long. Moreover, inflation
is now as good as it gets, interest rates are as low as the will go, price to
earnings multiples, therefore, are as high as they can be. Worse still, earnings
growth is rolling over, and may even be on the edge of a recession-style
decline. But, investors have repeatedly been fooled to the upside throughout
this bull cycle, and it may not be over yet. The portfolio managers have a sense
that the technology revolution is still not exhausted. Good companies so far
have found ways to use technology to run today's businesses better, but now they
will use it to design a better business model. As long as economic policy
actions do not rain on the ballpark, the game may not be over yet. In other
words, the current concerns (i.e., economy, earnings, deflation, etc.) could
prove to be short lived and not cause sustainable reversals. The portfolio
managers remain quite positive about the prospects for financial assets over the
long run.
UTILITIES PORTFOLIO
The Utilities Portfolio ("Portfolio") seeks to provide current income by
investing in equity and debt securities of companies in the utility industries.
For the year ended December 31, 1998, the Portfolio had a total return of
18.21%. In comparison, the Lipper Analytical Services, Inc. peer group total
return average was 16.79%. (Lipper is an independent fund-tracking
organization.)
An otherwise solid stock performance by the utility sector during 1998 was
overshadowed by another exceptional strong performance by the broad stock
market. For the year, the Portfolio, was 92% invested in stocks, 3% in bonds and
5% in cash reserves at year end. As of December 31, 1998, the portfolio manager
owned 44 stock positions and 3 bond issues. On the stock level, electric
utilities dominated with almost 61% of the Portfolio's assets, followed by
natural gas and telecommunications companies.
Last year was an exciting one within the utility stock universe because of the
extreme divergent investment results -- top performers up over 70%, and laggards
down more than 20%. The defining characteristic that separated the top
performers from their peers was the completion of their regulatory restructuring
plans thereby outlining management's long-term strategies. Once implemented,
these deregulated strategies resulted in improved earnings growth visibility and
reduced risk of regulatory uncertainties for each specific utility.
Thematically, 1998 was a year in which many companies seriously started
positioning themselves for the deregulated energy markets. Several large
utilities bought generating assets in other regions as part of a national
wholesale energy strategy while others exited the generation business in order
to focus on the regulated transmission and distribution business. International
39
<PAGE>
ANNUAL REPORT FOR THE TRAVELERS SERIES TRUST
- --------------------------------------------------------------------------------
acquisitions remained the focus of many companies at a time when other electric
companies were selling off international investments. In addition, the first
nuclear plant acquisition was made.
The portfolio managers anticipate that deregulation should accelerate in 1999
with the likely passage of restructuring legislation in key states such as New
Jersey, Texas and Michigan. Additionally, they anticipate a pick up in merger
and acquisition activity with small- and mid-sized utilities finding it
increasingly more difficult to compete in the complex deregulated market
hampered primarily by their size. As companies continue to restructure and
re-deploy capital investments they have assumed earnings growth for the sector
will remain in the three to five percent range and the average dividend pay out
(i.e. the portion of earnings distributed as dividends) will continue to decline
an average of twelve percentage points. For the successful companies, however,
the redeployment should set the stage for better total investment returns in the
future.
In closing, we thank you for your investment in The Travelers Series Trust. We
look forward to continuing to help you pursue your financial goals.
Sincerely,
/s/ HEATH B. MCLENDON
Heath B. McLendon
Chairman
January 13, 1999
40
<PAGE>
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON -- U.S. GOVERNMENT SECURITIES PORTFOLIO AS OF 12/31/98
(UNAUDITED)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
----------------------------
<S> <C>
Year Ended 12/31/98 10.20%
Five Years Ended 12/31/98 8.13%
1/24/92* through 12/31/98 8.36%
CUMULATIVE TOTAL RETURN
----------------------------------------------
1/24/92* through 12/31/98 74.63%
* Commencement of operations
</TABLE>
This chart assumes an initial investment of $10,000 made on January
24, 1992, assuming reinvestment of dividends, through December 31,
1998. The Lehman Government Bond Index is a broad-based Index of
all public debt obligations of the U.S. Government and its agencies
and has an average maturity of nine years. The Consumer Price Index
is a measure of the average change in prices over time in a fixed
market basket of goods and services.
<TABLE>
<CAPTION>
Lehman
Measurement Period U.S. Government Consumer
(Fiscal Year Covered) Government Bond Index Price Index
<S> <C> <C> <C>
1/24/92 10000 10000 10000
Dec-92 10790 10723 10275
Dec-93 11813 11866 10557
Dec-94 11147 11464 10840
Dec-95 13869 13567 11115
Dec-96 14077 13943 11484
Dec-97 15846 15280 11679
Jun-98 16630 15919 11801
</TABLE>
- --------------------------------------------------------------------------------
Past performance is not predictive of future performance. Investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
Average annual total returns are historical in nature and measure net investment
income and capital gain or loss from portfolio investments assuming
reinvestments of dividends. The returns do not reflect expenses associated with
the subaccount such as administrative fees, account charges and surrender
charges which, if reflected, would reduce the performance shown.
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON -- SOCIAL AWARENESS STOCK PORTFOLIO AS OF 12/31/98
(UNAUDITED)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
----------------------------
<S> <C>
Year Ended 12/31/98 32.27%
Five Years Ended 12/31/98 21.26%
5/1/92* through 12/31/98 18.41%
CUMULATIVE TOTAL RETURN
----------------------------------------------
5/1/92* through 12/31/98 208.75%
* Commencement of operations
</TABLE>
This chart assumes an initial investment of $10,000 made on May 1,
1992, assuming reinvestment of dividends, through December 31,
1998. The Standard & Poor's 500 Index is an unmanaged index
composed of 500 widely held common stocks listed on the New York
Stock Exchange, American Stock Exchange and the over-the-counter
market. The Consumer Price Index is a measure of the average change
in prices over time in a fixed market basket of goods and services.
<TABLE>
<CAPTION>
Social
Awareness Standard &
Measurement Period Stock Poor's 500 Consumer
(Fiscal Year Covered) Portfolio Index Price Index
<S> <C> <C> <C>
5/1/92 10000 10000 10000
Dec-92 10950 10673 10157
Dec-93 11777 11745 10436
Dec-94 11461 11900 10716
Dec-95 15285 14509 10988
Dec-96 18340 17838 11353
Dec-97 23343 23789 11545
Jun-98 27731 28004 11666
</TABLE>
- --------------------------------------------------------------------------------
Past performance is not predictive of future performance. Investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
Average annual total returns are historical in nature and measure net investment
income and capital gain or loss from portfolio investments assuming
reinvestments of dividends. The returns do not reflect expenses associated with
the subaccount such as administrative fees, account charges and surrender
charges which, if reflected, would reduce the performance shown.
41
<PAGE>
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON -- UTILITIES PORTFOLIO AS OF 12/31/98 (UNAUDITED)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
----------------------------
<S> <C>
Year Ended 12/31/98 18.21%
2/4/94* through 12/31/98 17.08%
CUMULATIVE TOTAL RETURN
----------------------------------------------
2/4/94* through 12/31/98 116.8%
* Commencement of operations
</TABLE>
This chart assumes an initial investment of $10,000 made on
February 4, 1994, assuming reinvestment of dividends, through
December 31, 1998. Standard & Poor's 500 Index is an unmanaged
index composed of 500 widely held common stocks listed on the New
York Stock Exchange, American Stock Exchange and over-the-counter
market. The Consumer Price Index is a measure of the average change
in prices over time in a fixed market basket of goods and services.
<TABLE>
<CAPTION>
Standard &
Measurement Period Utilities Poor's 500 Consumer
(Fiscal Year Covered) Portfolio Index Price Index
<S> <C> <C> <C>
2/4/94 10000 10000 10000
Dec-94 10170 10072 10205
Dec-95 13149 13852 10464
Dec-96 14638 17031 10811
Dec-97 18340 22712 10995
Jun-98 19825 26737 11110
</TABLE>
- --------------------------------------------------------------------------------
Past performance is not predictive of future performance. Investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
Average annual total returns are historical in nature and measure net investment
income and capital gain or loss from portfolio investments assuming
reinvestments of dividends. The returns do not reflect expenses associated with
the subaccount such as administrative fees, account charges and surrender
charges which, if reflected, would reduce the performance shown.
42
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS DECEMBER 31, 1998
U.S. GOVERNMENT SECURITIES PORTFOLIO
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
- --------------------------------------------------------------------------------------
<C> <S> <C>
U.S. GOVERNMENT AND AGENCY OBLIGATIONS -- 90.0%
$7,500,000 U.S. Treasury Bonds, 5.250% due 11/15/28.................... $ 7,682,700
4,000,000 U.S. Treasury Notes, 7.500% due 11/15/16.................... 4,970,440
7,160,000 U.S. Treasury Notes, 8.125% due 8/15/21+.................... 9,701,156
4,916,462 FHLMC Certificates, Gold 6.000% due 11/1/28................. 4,861,152
3,906,540 FHLMC Certificates, Gold 6.500% due 12/1/13................. 3,967,560
3,029,999 FHLMC Certificates, 7.500% due 9/1/24 @..................... 3,114,263
1,472,951 FNMA Certificates, 6.000% due 10/1/13....................... 1,477,974
1,734,944 FNMA Certificates, 6.500% due 1/1/13 @...................... 1,760,969
2,940,460 FNMA Certificates, 6.500% due 12/1/27....................... 2,961,572
1,146,798 FNMA Certificates, 7.000% due 1/1/10........................ 1,172,602
4,609,956 FNMA Certificates, 7.000% due 5/1/28 @...................... 4,706,441
1,978,205 GNMA Certificates, 6.000% due 4/20/28....................... 1,954,091
2,020,000 GNMA Certificates, 6.500% due 12/15/28...................... 2,042,079
858,537 GNMA Certificates, 8.500% due 7/15/18 @..................... 911,123
2,184,395 GNMA Certificates, 9.000% due 9/15/09 @..................... 2,332,518
9,000,000 GNMA Certificates, RFCO Strip, zero coupon to yield 5.743%
due 10/15/13................................................ 3,915,000
2,000,000 Tennessee Valley Authority Debenture, 6.250% due 12/15/17... 2,120,000
- --------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS
(Cost -- $59,179,938)....................................... 59,651,640
- --------------------------------------------------------------------------------------
REPURCHASE AGREEMENT -- 10.0%
6,681,000 CS First Boston, 4.400% due 1/4/99; Proceeds at
maturity -- $6,684,266; (Fully collateralized by U.S.
Treasury Notes, 5.375% due 1/31/00 Market
value -- $6,816,889) (Cost -- $6,681,000)................... 6,681,000
- --------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100% (Cost -- $65,860,938*)............ $66,332,640
- --------------------------------------------------------------------------------------
</TABLE>
+ Security is segregated by Custodian for open purchase commitments.
@ Date shown represents the last in range of maturity dates of mortgage
certificates owned.
* Aggregate cost for federal income tax purpose is substantially the same.
SEE NOTES TO FINANCIAL STATEMENTS.
43
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
SOCIAL AWARENESS STOCK PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- -----------------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCK -- 93.7%
- -----------------------------------------------------------------------------------------
BASIC MATERIALS -- 3.0%
4,000 Air Products & Chemicals, Inc. ............................. $ 160,000
6,000 Alcoa Inc................................................... 447,375
15,000 Engelhard Corp. ............................................ 292,500
8,000 Praxair, Inc. .............................................. 282,000
- -----------------------------------------------------------------------------------------
1,181,875
- -----------------------------------------------------------------------------------------
CAPITAL GOODS -- 3.4%
4,500 Belden, Inc. ............................................... 95,344
5,600 Philips Electronics N.V. ................................... 379,050
8,300 Pitney Bowes, Inc. ......................................... 548,319
14,500 U.S. Filter Corp. (a)....................................... 331,687
- -----------------------------------------------------------------------------------------
1,354,400
- -----------------------------------------------------------------------------------------
COMMUNICATION -- 2.1%
11,836 MCI Worldcom Inc. (a) ...................................... 849,233
- -----------------------------------------------------------------------------------------
CONSUMER CYCLICALS -- 15.9%
7,000 Black & Decker Corp. ....................................... 392,437
13,593 Dollar General Corp. ....................................... 321,135
12,700 Home Depot, Inc. ........................................... 777,081
50,000 Interface, Inc. ............................................ 464,062
11,000 Kaufman and Broad Home Corp. ............................... 316,250
7,000 Liz Claiborne, Inc. ........................................ 220,937
15,000 Lowe's Cos., Inc. .......................................... 767,813
8,000 May Department Stores....................................... 483,000
10,000 Ross Stores, Inc............................................ 393,750
13,800 Staples, Inc. (a)........................................... 602,887
12,000 Sylvan Learning Systems, Inc. (a)........................... 366,000
8,600 Tribune Co.................................................. 567,600
7,400 Wal-Mart Stores, Inc. ...................................... 602,638
- -----------------------------------------------------------------------------------------
6,275,590
- -----------------------------------------------------------------------------------------
CONSUMER STAPLES -- 12.3%
9,400 American Stores Co. ........................................ 347,213
18,000 Brinker International, Inc. (a)............................. 519,750
8,700 Kroger Co. (a).............................................. 526,350
14,800 Newell Co. ................................................. 610,500
4,800 PepsiCo, Inc. .............................................. 196,500
9,200 Rite Aid Corp. ............................................. 455,975
22,700 Sysco Corp. ................................................ 622,831
7,480 Tricon Global Restaurants, Inc. (a)......................... 374,935
8,000 Unilever N. V. ............................................. 663,500
4,800 Walt Disney Co. ............................................ 144,000
18,000 Wendy's International, Inc. ................................ 392,625
- -----------------------------------------------------------------------------------------
4,854,179
- -----------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
44
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
SOCIAL AWARENESS STOCK PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- -----------------------------------------------------------------------------------------
<C> <S> <C>
ENERGY -- 3.1%
9,100 AES Corp. (a) .............................................. $ 431,112
6,600 Anadarko Petroleum Corp. ................................... 203,775
6,750 Baker Hughes Inc. .......................................... 119,391
5,370 British Petroleum Co. PLC................................... 481,286
- -----------------------------------------------------------------------------------------
1,235,564
- -----------------------------------------------------------------------------------------
FINANCIAL SERVICES -- 19.0%
9,700 ACE, Ltd. .................................................. 334,044
9,200 Allstate Corp. ............................................. 355,350
4,000 American Express Co. ....................................... 409,000
6,112 American International Group Inc. .......................... 590,572
14,400 Associates First Capital Corp. ............................. 610,200
9,962 BankAmerica Corp. .......................................... 598,965
5,400 BankBoston Corp. ........................................... 210,263
13,300 Chase Manhattan Corp. ...................................... 905,231
10,000 CIT Group Inc. ............................................. 318,125
9,400 Freddie Mac................................................. 605,713
14,000 IndyMac Mortgage Holdings, Inc. ............................ 147,875
7,000 Lincoln National Corp. ..................................... 572,687
11,800 Provident Cos., Inc. ....................................... 489,700
13,300 St. Paul Co., Inc. ......................................... 462,175
6,800 State Street Corp. ......................................... 473,025
3,000 Transamerica Corp. ......................................... 346,500
2,540 Washington Mutual, Inc. .................................... 96,996
- -----------------------------------------------------------------------------------------
7,526,421
- -----------------------------------------------------------------------------------------
HEALTH CARE -- 11.2%
6,200 Amgen Inc. (a).............................................. 648,288
11,400 C. R. Bard, Inc. ........................................... 564,300
12,000 DENTSPLY International, Inc. ............................... 309,000
6,200 Johnson & Johnson........................................... 520,025
3,300 Merck & Co., Inc. .......................................... 487,369
10,000 Mylan Laboratories Inc. .................................... 315,000
2,400 Pfizer, Inc. ............................................... 301,050
11,200 Schering-Plough Corp. ...................................... 618,800
7,200 Stryker Corp. .............................................. 396,450
10,000 Tenet Healthcare Corp. (a).................................. 262,500
- -----------------------------------------------------------------------------------------
4,422,782
- -----------------------------------------------------------------------------------------
TECHNOLOGY -- 17.5%
19,500 Anixter International Inc. (a).............................. 396,094
5,000 Ascend Communications, Inc. (a)............................. 328,750
5,100 Automatic Data Processing, Inc. ............................ 408,956
12,125 Caliber Learning Network, Inc. (a).......................... 51,531
10,350 Cisco Systems Inc. (a)...................................... 960,609
12,500 Compaq Computer Corp. ...................................... 524,219
10,000 Electronic Data Systems Corp................................ 502,500
14,000 EMC Corp. (a)............................................... 1,190,000
1,700 Intel Corp. ................................................ 201,556
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
45
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
SOCIAL AWARENESS STOCK PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- -----------------------------------------------------------------------------------------
<C> <S> <C>
TECHNOLOGY -- 17.5% (CONTINUED)
4,400 International Business Machines Corp. ...................... $ 812,900
5,200 Lucent Technologies Corp. .................................. 572,000
3,100 Sun Microsystems Inc. (a)................................... 265,438
5,900 Xerox Corp. ................................................ 696,200
- -----------------------------------------------------------------------------------------
6,910,753
- -----------------------------------------------------------------------------------------
TRANSPORTATION -- 3.5%
12,900 Norfolk Southern Corp. ..................................... 408,769
24,125 Southwest Airlines.......................................... 541,305
15,000 USFreightways Corp. ........................................ 436,875
- -----------------------------------------------------------------------------------------
1,386,949
- -----------------------------------------------------------------------------------------
UTILITIES -- 2.7%
11,000 Enron Corp. ................................................ 627,687
14,700 Williams Cos., Inc. ........................................ 458,456
- -----------------------------------------------------------------------------------------
1,086,143
- -----------------------------------------------------------------------------------------
TOTAL COMMON STOCK (Cost -- $24,610,693).................... 37,083,889
- -----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
FACE
AMOUNT SECURITY VALUE
<C> <S> <C>
REPURCHASE AGREEMENT -- 6.3%
$2,511,000 CS First Boston Corp., 4.400% due 1/4/99; Proceeds at
maturity -- $2,512,225; (Fully collaterized by U.S. Treasury
Notes, 5.375% due 1/31/00; Market Value -- $2,561,220)
(Cost -- $2,511,000)........................................ 2,511,000
- -----------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100% (Cost -- $27,121,693*)............ $39,594,889
- -----------------------------------------------------------------------------------------
</TABLE>
(a) Non-income producing security.
* Aggregate cost for Federal income tax purposes is substantially the same.
SEE NOTES TO FINANCIAL STATEMENTS.
46
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
UTILITIES PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- -------------------------------------------------------------------------------------------------------
<C> <C> <S> <C>
COMMON STOCK -- 91.8%
- -------------------------------------------------------------------------------------------------------
BROADCASTING & CABLE -- 2.9%
20,000 MediaOne Group, Inc.+....................................... $ 940,000
- -------------------------------------------------------------------------------------------------------
ELECTRIC-UTILITY -- 61.1%
11,000 American Electric Power Co., Inc. .......................... 517,687
20,000 BEC Energy.................................................. 823,750
15,000 Cinergy Corp. .............................................. 515,625
25,000 CMS Energy Corp. ........................................... 1,210,937
13,500 Dominion Resources Inc. .................................... 631,125
30,000 DQE, Inc. .................................................. 1,318,125
20,000 Edison International........................................ 557,500
25,000 El Paso Energy, Corp. ...................................... 870,312
10,000 Energy East Corp. .......................................... 565,000
10,000 FPL Group, Inc. ............................................ 616,250
25,000 FirstEnergy Corp. .......................................... 814,063
20,000 Florida Progress Corp. ..................................... 896,250
20,000 GPU, Inc. .................................................. 883,750
10,000 Houston Industries Inc. .................................... 321,250
15,000 Illinova Corp. ............................................. 375,000
15,000 Montana Power Co. .......................................... 848,438
20,000 NIPSCO Industries, Inc. .................................... 608,750
10,000 New Century Energies, Inc. ................................. 487,500
38,000 Niagara Mohawk Power Corp.+................................. 612,750
20,000 Northern States Power Co. .................................. 555,000
30,000 PECO Energy Co. ............................................ 1,248,750
25,000 Pinnacle West Capital Corp. ................................ 1,059,375
10,000 Public Service Enterprise Group, Inc. ...................... 400,000
15,000 SCANA Corp. ................................................ 483,750
15,000 Sierra Pacific Resources.................................... 570,000
20,000 Texas Utilities Co. ........................................ 933,750
30,000 Unicom Corp. ............................................... 1,156,875
- -------------------------------------------------------------------------------------------------------
19,881,562
- -------------------------------------------------------------------------------------------------------
NATURAL GAS -- 14.7%
16,000 Coastal Corp. .............................................. 559,000
10,000 Consolidated Natural Gas Co. ............................... 540,000
22,000 Energen Corp. .............................................. 429,000
10,000 K N Energy,Inc.............................................. 375,625
15,000 MCN Energy Group, Inc. ..................................... 285,938
15,000 MDU Resources Group, Inc. .................................. 394,687
15,000 National Fuel Gas Co. ...................................... 677,813
20,000 Sempra Energy............................................... 507,500
10,000 Southwest Gas Corp. ........................................ 268,750
24,000 Williams Cos., Inc. ........................................ 748,500
- -------------------------------------------------------------------------------------------------------
4,786,813
- -------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
47
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 1998
UTILITIES PORTFOLIO
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- -------------------------------------------------------------------------------------------------------
<C> <C> <S> <C>
TELEPHONE -- 13.1%
10,000 Bell Atlantic Corp. ........................................ $ 568,125
10,000 GTE Corp. .................................................. 674,375
20,000 MCI Worldcom, Inc.+......................................... 1,435,000
8,000 NEXTLINK Communications Inc.+............................... 227,000
6,000 Qwest Communications International Inc.+.................... 300,000
20,000 SBC Communications Inc. .................................... 1,072,500
- -------------------------------------------------------------------------------------------------------
4,277,000
- -------------------------------------------------------------------------------------------------------
29,885,375
TOTAL COMMON STOCK (Cost -- $23,250,344)....................
- -------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT RATING (A) SECURITY VALUE
<C> <C> <S> <C>
- -------------------------------------------------------------------------------------------------------
CORPORATE BONDS -- 1.4%
- -------------------------------------------------------------------------------------------------------
ELECTRIC-UTILITY -- 0.6%
$ 200,000 A- Arizona Public Service Co., 7.250% due 8/1/23............... 205,000
- -------------------------------------------------------------------------------------------------------
TELEPHONE -- 0.8%
230,000 A- MCI Communication Corp., 7.750% due 3/23/25................. 248,113
- -------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS (Cost -- $404,653).................... 453,113
- -------------------------------------------------------------------------------------------------------
U.S. TREASURY OBLIGATIONS -- 1.6%
500,000 U.S. Treasury Notes, 7.750% due 11/30/99
(Cost -- $499,933).......................................... 513,750
- -------------------------------------------------------------------------------------------------------
SUB-TOTAL INVESTMENTS (Cost -- $24,154,930)................. 30,852,238
- -------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT -- 5.2%
1,688,000 CS First Boston Corp., 4.400% due 1/4/99; Proceeds at
maturity -- $1,688,825; (Fully collateralized by U.S.
Treasury Note, 5.375% due 1/31/00; Market
value -- $1,722,508) (Cost -- $1,688,000)................... 1,688,000
- -------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100% (Cost -- $25,842,930**)........... $32,540,238
- -------------------------------------------------------------------------------------------------------
</TABLE>
+ Non-income producing security.
(a) All ratings are by Standard & Poor's Ratings Services, except that those
identified by an asterisk (*) are rated by Moody's Investors Service Inc.
** Aggregate cost for Federal income tax purposes is substantially the same.
See page 49 for definitions of ratings.
SEE NOTES TO FINANCIAL STATEMENTS.
48
<PAGE>
- --------------------------------------------------------------------------------
BOND RATINGS (UNAUDITED)
The definitions of the applicable rating symbols are set forth below:
Standard & Poor's Ratings Services ("Standard & Poor's") -- Ratings from "AA" to
"C" may be modified by the addition of a plus (+) or a minus (-) sign to show
relative standings within the major rating categories.
<TABLE>
<S> <C> <C>
AAA -- Bonds rated "AAA" has the highest rating assigned by
Standard & Poor's. Capacity to pay interest and repay
principal is extremely strong.
AA -- Bonds rated "AA" has a very strong capacity to pay interest
and repay principal and differs from the highest rated issue
only in a small degree.
A -- Bonds rated "A" has a strong capacity to pay interest and
repay principal although it is somewhat more susceptible to
the adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories.
BBB -- Bonds rated "BBB" are regarded as having an adequate
capacity to pay interest and repay principal. Whereas they
normally exhibit adequate protection parameters, adverse
economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and
repay principal for bonds in this category than for bonds in
higher rated categories.
BB, B -- Bonds rated "BB" and "B" are regarded, on balance, as
and CCC predominantly speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of
the obligation. "BB" represents a lower degree of
speculation than "B", and "CCC" the highest degree of
speculation. While such bonds will likely have some quality
and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse
conditions.
C -- The rating "C" is reserved for income bonds on which no
interest is being paid.
D -- Bonds rated "D" are in default, and payment of interest
and/or repayment of principal is in arrears.
</TABLE>
Moody's Investors Service Inc. ("Moody's") -- Numerical modifiers 1, 2 and 3 may
be applied to each generic rating from "Aa" to "C", where 1 is the highest and 3
the lowest rating within its generic category.
<TABLE>
<S> <C> <C>
Aaa -- Bonds rated "Aaa" are judged to be of the best quality. They
carry the smallest degree of investment risk and are
generally referred to as "gilt edge." Interest payments are
protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective
elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally
strong position of such issues.
Aa -- Bonds rated "Aa" are judged to be of high quality by all
standards. Together with the "Aaa" group they comprise what
are generally known as high grade bonds. They are rated
lower than the best bonds because margins of protection may
not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may
be other elements present which make the long-term risks
appear somewhat larger than in "Aaa" securities.
A -- Bonds rated "A" possess many favorable investment attributes
and are to be considered as upper medium grade obligations.
Factors giving security to principal and interest are
considered adequate but elements may be present which
suggest a susceptibility to impairment some time in the
future.
Baa -- Bonds rated "Baa" are considered to be medium grade
obligations; that is, they are neither highly protected nor
poorly secured. Interest payment and principal security
appear adequate for the present but certain protective
elements may be lacking or may be characteristically
unreliable over any great length of time. These bonds lack
outstanding investment characteristics and may have
speculative characteristics as well.
Ba -- Bonds rated "Ba" are judged to have speculative elements;
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very
moderate and thereby not well safeguarded during both good
and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds rated "B" generally lack characteristics of desirable
investments. Assurance of interest and principal payments or
of maintenance of other terms of the contract over any long
period of time may be small.
Caa -- Bonds rated "Caa" are of poor standing. These issues may be
in default, or present elements of danger may exist with
respect to principal or interest.
Ca -- Bonds rated "Ca" represent obligations which are speculative
in a high degree. Such issues are often in default or have
other marked shortcomings.
C -- Bonds rated "C" are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
NR -- Indicates that the bond is not rated by Standard & Poor's or
Moody's.
</TABLE>
49
<PAGE>
- --------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES DECEMBER 31, 1998
<TABLE>
<CAPTION>
U.S. GOVERNMENT SOCIAL AWARENESS
SECURITIES STOCK UTILITIES
PORTFOLIO PORTFOLIO PORTFOLIO
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS:
Investments -- Cost.................................. $59,179,938 $24,610,693 $24,154,930
Repurchase Agreements -- Cost........................ 6,681,000 2,511,000 1,688,000
- -------------------------------------------------------------------------------------------------------------
Investments, at value................................ 59,651,640 37,083,889 30,852,238
Repurchase Agreements, at value...................... 6,681,000 2,511,000 1,688,000
Cash................................................. 616 961 957
Dividends and interest receivable.................... 490,711 26,064 95,622
Receivable for securities sold....................... 1,100 -- 566,534
Receivable for Fund shares sold...................... -- 96,138 34,346
- -------------------------------------------------------------------------------------------------------------
TOTAL ASSETS......................................... 66,825,067 39,718,052 33,237,697
- -------------------------------------------------------------------------------------------------------------
LIABILITIES:
Payable for Fund shares purchased.................... 336,265 -- --
Investment advisory fee payable...................... 12,069 34,383 17,391
Administration fees payable.......................... 2,738 1,923 1,337
Payable for securities purchased..................... -- 172,500 280,665
Accrued expenses..................................... 19,985 26,993 29,254
- -------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES.................................... 371,057 235,799 328,647
- -------------------------------------------------------------------------------------------------------------
TOTAL NET ASSETS....................................... $66,454,010 $39,482,253 $32,909,050
- -------------------------------------------------------------------------------------------------------------
NET ASSETS:
Paid-in capital...................................... $66,321,107 $25,882,430 $23,621,357
Undistributed net investment income.................. 5,474 185,510 791,288
Accumulated net realized gain (loss) from security
transactions...................................... (344,273) 941,117 1,799,097
Net unrealized appreciation of investments........... 471,702 12,473,196 6,697,308
- -------------------------------------------------------------------------------------------------------------
TOTAL NET ASSETS....................................... $66,454,010 $39,482,253 $32,909,050
- -------------------------------------------------------------------------------------------------------------
SHARES OUTSTANDING..................................... 5,632,090 1,523,475 1,915,301
- -------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, PER SHARE............................. $11.80 $25.92 $17.18
- -------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
50
<PAGE>
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
U.S. GOVERNMENT SOCIAL AWARENESS
SECURITIES STOCK UTILITIES
PORTFOLIO PORTFOLIO PORTFOLIO
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest................................................ $ 2,768,644 $ 148,059 $ 160,794
Dividends............................................... -- 284,074 841,414
Less: Foreign withholding tax........................... -- (2,485) --
- -------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT INCOME................................. 2,768,644 429,648 1,002,208
- -------------------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2)....................... 156,432 189,593 168,378
Administration fees (Note 2)............................ 28,818 17,501 15,543
Audit and legal......................................... 9,588 20,192 13,270
Shareholder and system servicing fees................... 6,704 7,373 6,244
Custody................................................. 4,233 3,496 3,008
Shareholder communications.............................. 3,677 1,195 2,004
Trustees' fees.......................................... 2,806 1,435 --
Pricing service fees.................................... 2,000 -- --
Other................................................... 1,299 3,353 293
- -------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES.......................................... 215,557 244,138 208,740
- -------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME..................................... 2,553,087 185,510 793,468
- -------------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (NOTE
3):
Realized Gain From Security Transactions (excluding
short-term securities):
Proceeds from sales.................................. 155,003,524 3,739,552 12,467,141
Cost of securities sold.............................. 151,988,200 2,787,421 10,670,224
- -------------------------------------------------------------------------------------------------------------
NET REALIZED GAIN....................................... 3,015,324 952,131 1,796,917
- -------------------------------------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Beginning of year.................................... 1,707,052 5,325,740 4,788,605
End of year.......................................... 471,702 12,473,196 6,697,308
- -------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET UNREALIZED APPRECIATION...... (1,235,350) 7,147,456 1,908,703
- -------------------------------------------------------------------------------------------------------------
NET GAIN ON INVESTMENTS................................... 1,779,974 8,099,587 3,705,620
- -------------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM OPERATIONS.................... $4,333,061 $8,285,097 $4,499,088
- -------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
51
<PAGE>
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
U.S. GOVERNMENT SOCIAL AWARENESS
SECURITIES STOCK UTILITIES
PORTFOLIO PORTFOLIO PORTFOLIO
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------
OPERATIONS:
Net investment income............................ $ 2,553,087 $ 185,510 $ 793,468
Net realized gain................................ 3,015,324 952,131 1,796,917
Increase (decrease) in net unrealized
appreciation.................................. (1,235,350) 7,147,456 1,908,703
- -------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM OPERATIONS........... 4,333,061 8,285,097 4,499,088
- -------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income............................ (2,585,952) (156,005) (643,885)
Net realized gains............................... (2,807,849) (535,723) (609,017)
- -------------------------------------------------------------------------------------------------------
DECREASE IN NET ASSETS FROM DISTRIBUTIONS TO
SHAREHOLDERS.................................. (5,393,801) (691,728) (1,252,902)
- -------------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 8):
Net proceeds from sale of shares................. 37,655,108 12,345,818 10,648,592
Net asset value of shares issued for reinvestment
of dividends.................................. 5,393,801 691,728 1,252,902
Cost of shares reacquired........................ (10,813,602) (2,161,874) (3,651,686)
- -------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM FUND SHARE
TRANSACTIONS.................................. 32,235,307 10,875,672 8,249,808
- -------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS............................. 31,174,567 18,469,041 11,495,994
NET ASSETS:
Beginning of year................................ 35,279,443 21,013,212 21,413,056
- -------------------------------------------------------------------------------------------------------
END OF YEAR*..................................... $ 66,454,010 $39,482,253 $32,909,050
- -------------------------------------------------------------------------------------------------------
* Includes undistributed net investment income
of:........................................... $5,474 $185,510 $791,288
- -------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
52
<PAGE>
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED) FOR THE YEAR ENDED DECEMBER
31, 1997
<TABLE>
<CAPTION>
U.S. GOVERNMENT SOCIAL AWARENESS
SECURITIES STOCK UTILITIES
PORTFOLIO PORTFOLIO PORTFOLIO
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------
OPERATIONS:
Net investment income............................ $ 1,693,404 $ 156,049 $ 643,930
Net realized gain................................ 195,243 535,769 631,548
Increase in net unrealized appreciation.......... 1,522,395 2,877,071 2,917,676
- -------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM OPERATIONS........... 3,411,042 3,568,889 4,193,154
- -------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income............................ (1,694,724) -- (19,187)
Net realized gains............................... -- -- (8,193)
- -------------------------------------------------------------------------------------------------------
DECREASE IN NET ASSETS FROM DISTRIBUTIONS TO
SHAREHOLDERS.................................. (1,694,724) -- (27,380)
- -------------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 9):
Net proceeds from sale of shares................. 11,415,299 8,734,543 4,576,098
Net asset value of shares issued for reinvestment
of dividends.................................. 1,694,724 -- 27,380
Cost of shares reacquired........................ (5,555,432) (2,330,215) (5,570,422)
- -------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM FUND SHARE
TRANSACTIONS.................................. 7,554,591 6,404,328 (966,944)
- -------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS............................. 9,270,909 9,973,217 3,198,830
NET ASSETS:
Beginning of year................................ 26,008,534 11,039,995 18,214,226
- -------------------------------------------------------------------------------------------------------
END OF YEAR*..................................... $35,279,443 $21,013,212 $21,413,056
- -------------------------------------------------------------------------------------------------------
* Includes undistributed net investment income
of:........................................... $23,858 $156,049 $643,930
- -------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
53
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
The U.S. Government Securities, Social Awareness Stock and Utilities
Portfolios (collectively, "Portfolio(s)") are separate investment portfolios of
The Travelers Series Trust ("Trust"). The Trust is a Massachusetts business
trust registered under the Investment Company Act of 1940, as amended, as a
diversified, open-end management investment company and consists of these
portfolios and 16 other separate investment portfolios: Travelers Quality Bond,
Lazard International Stock, MFS Emerging Growth, Federated High Yield, Federated
Stock, Large Cap, Equity Income, Disciplined Mid Cap Stock (formerly known as
Mid Cap Disciplined Equity Fund), Convertible Bond, Strategic Stock, Disciplined
Small Cap Stock, MFS Mid Cap Growth, MFS Research, Zero Coupon Bond Fund
Portfolio Series 2000 and Zero Coupon Bond Fund Portfolio Series 2005
Portfolios. Shares of the Trust are offered only to insurance company separate
accounts that fund certain variable annuity and variable life insurance
contracts. The financial statements and financial highlights for the other
portfolios are presented in separate semi-annual reports.
The significant accounting policies consistently followed by the Portfolios
are: (a) security transactions are accounted for on trade date; (b) securities
traded on national securities markets are valued at the closing prices on such
markets; securities for which no sales prices were reported and U.S. Government
and Agency obligations are valued at the mean between the last reported bid and
asked prices or on the basis of quotations received from reputable brokers or
other recognized sources; (c) securities for which market quotations are not
available will be valued in good faith at fair value by or under the direction
of the Board of Trustees; (d) securities maturing within 60 days are valued at
cost plus accreted discount, or minus amortized premium, which approximates
value; (e) securities that have a maturity of 60 days or more are valued at
prices based on market quotations for securities of similar type, yield and
maturity; (f) interest income, adjusted for amortization of premium and
accretion of discount, is recorded on the accrual basis and dividend income is
recorded on the ex-dividend date; (g) gains or losses on the sale of securities
are calculated by using the specific identification method; (h) dividends and
distributions to shareholders are recorded on the ex-dividend date; (i) the
Portfolios intend to comply with the requirements of the Internal Revenue Code
of 1986, as amended, pertaining to regulated investment companies and to make
distributions of taxable income sufficient to relieve it from substantially all
Federal income and excise taxes; (j) the character of income and gains to be
distributed are determined in accordance with income tax regulations which may
differ from generally accepted accounting principles. At December 31, 1998,
reclassifications were made to the capital accounts of the U.S. Government
Securities Portfolio, Social Awareness Stock Portfolio and Utilities Portfolio
to reflect permanent book/tax differences and income and gains available for
distribution under income tax regulations. Accordingly, for the Social Awareness
Stock Portfolio, a portion of undistributed net investment income amounting to
$44 and a portion of accumulated net realized gains amounting to $23 was
reclassified to paid-in capital. In addition, for the Utilities Portfolio, a
portion of undistributed net investment income amounting to $45 and a portion of
accumulated net realized gains amounting to $115 was reclassified to paid-in
capital. Net investment income, net realized gains and net assets for each
Portfolio were not affected by these changes; and (k) estimates and assumptions
are required to be made regarding assets, liabilities and changes in net assets
resulting from operations when financial statements are prepared. Changes in the
economic environment, financial markets and any other parameters used in
determining these estimates could cause actual results to differ.
2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS
Travelers Asset Management International Corporation ("TAMIC"), an indirect
wholly owned subsidiary of Citigroup, Inc., acts as investment manager and
advisor to the U.S. Government Securities Portfolio ("USGS"). USGS pays TAMIC an
investment management and advisory fee calculated at the annual rate of 0.3233%
of its average daily net assets. This fee is calculated daily and paid monthly.
Mutual Management Corp. ("MMC"), a subsidiary of Salomon Smith Barney
Holdings Inc. ("SSBH") and an indirect wholly owned subsidiary of Citigroup,
Inc., acts as investment manager and advisor to the Social Awareness Stock
("SAS") and Utilities ("Utilities") Portfolios. SAS pays MMC an investment
management and advisory fee calculated at an annual rate of: 0.65% on the first
$50 million, 0.55% on the next $50 million, 0.45% on the next $100 million and
0.40% on amounts over $200 million of the average daily net assets. Utilities
pays MMC investment management and advisory fees calculated at an annual rate of
0.65% of the average daily net assets. These fees are calculated daily and paid
monthly.
54
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Travelers Insurance Company ("Travelers Insurance") acts as administrator
to the Portfolios. The Portfolios pay Travelers Insurance an administration fee
calculated at an annual rate of 0.06% of the average daily net assets. Travelers
Insurance has entered into a sub-administrative services agreement with MMC.
Travelers Insurance pays MMC, as sub-administrator, a fee calculated at an
annual rate of 0.06% of the average daily net assets of each Portfolio. This fee
is calculated daily and paid monthly.
One Trustee and all officers of the Trust are employees of Citigroup, Inc.,
or its subsidiaries.
3. INVESTMENTS
During the year ended December 31, 1998, the aggregate cost of purchases
and proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
<TABLE>
<CAPTION>
USGS SAS UTILITIES
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Purchases................................................... $182,265,242 $14,110,116 $20,069,550
- ------------------------------------------------------------------------------------------------------
Sales....................................................... 155,003,524 3,739,552 12,467,141
</TABLE>
- --------------------------------------------------------------------------------
At December 31, 1998, aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:
<TABLE>
<CAPTION>
USGS SAS UTILITIES
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross unrealized appreciation............................... $ 628,555 $13,361,023 $7,033,982
Gross unrealized depreciation............................... (156,853) (887,827) (336,674)
- --------------------------------------------------------------------------------------------------
Net unrealized appreciation................................. $ 471,702 $12,473,196 $6,697,308
- --------------------------------------------------------------------------------------------------
</TABLE>
4. REPURCHASE AGREEMENTS
The Portfolios purchase (and their custodian takes possession of) U.S.
Government securities from banks and securities dealers subject to agreements to
resell the securities to the sellers at a future date (generally, the next
business day) at an agreed-upon higher repurchase price. The Portfolios require
continual maintenance of the market value of the collateral in amounts at least
equal to the repurchase price.
5. FUTURES CONTRACTS
Initial margin deposits made upon entering into futures contracts are
recognized as assets. The initial margin is segregated by the custodian and is
noted in the schedule of investments. During the period the futures contract is
open, changes in the value of the contract are recognized as unrealized gains or
losses by "marking-to-market" on a daily basis to reflect the market value of
the contract at the end of each day's trading. Variation margin payments are
made or received and recognized as assets due from or liabilities due to broker,
depending upon whether unrealized gains or losses are incurred. When the
contract is closed, the Portfolios record a realized gain or loss equal to the
difference between the proceeds from (or cost of) the closing transactions and
the Portfolio's basis in the contract.
The Portfolios enter into such contracts to hedge portions of their
respective portfolios. The Portfolios bear the market risk that arises from
changes in the value of the financial instruments and securities indices
(futures contracts).
At December 31, 1998, the Portfolios had no open futures contracts.
55
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. OPTIONS CONTRACTS
Premiums paid when put or call options are purchased by the Portfolios,
represent investments, which are "marked-to-market" daily. When a purchased
option expires, the Portfolios will realize a loss in the amount of the premium
paid. When the Portfolios enter into closing sales transactions, the Portfolios
will realize a gain or loss depending on whether the proceeds from the closing
sales transactions are greater or less than the premium paid for the option.
When the Portfolios exercise a put option, they will realize a gain or loss from
the sale of the underlying security and the proceeds from such sale will be
decreased by the premium originally paid. When the Portfolios exercise a call
option, the cost of the security which the Portfolios purchase upon exercise
will be increased by the premium originally paid.
At December 31, 1998, the Portfolios had no open purchased call or put
options contracts.
7. SECURITIES TRADED ON A TO-BE-ANNOUNCED BASIS
The Portfolios may trade securities on a "to-be-announced" ("TBA") basis.
In a TBA transaction, the Portfolios commit to purchasing or selling securities
for which specific information is not yet known at the time of the trade,
particularly the face amount and maturity date in GNMA/FNMA transactions.
Securities purchased on a TBA basis are not settled until they are delivered to
the Portfolios, normally 15 to 45 days later. These transactions are subject to
market fluctuations and their current value is determined in the same manner as
for other securities.
At December 31, 1998, USGS held no TBA securities.
8. SHARES OF BENEFICIAL INTEREST
The Declaration of Trust authorizes the issuance of an unlimited number of
shares of beneficial interest without par value. Transactions in shares of each
Portfolio were as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT SECURITIES PORTFOLIO
Shares sold................................................. 3,036,112 978,971
Shares issued on reinvestment............................... 457,035 145,971
Shares redeemed............................................. (888,165) (491,712)
- -------------------------------------------------------------------------------
Net Increase................................................ 2,604,982 633,230
- -------------------------------------------------------------------------------
SOCIAL AWARENESS STOCK PORTFOLIO
Shares sold................................................. 542,975 479,843
Shares issued on reinvestment............................... 29,867 --
Shares redeemed............................................. (96,777) (132,790)
- -------------------------------------------------------------------------------
Net Increase................................................ 476,065 347,053
- -------------------------------------------------------------------------------
UTILITIES PORTFOLIO
Shares sold................................................. 663,583 341,896
Shares issued on reinvestment............................... 80,676 1,816
Shares redeemed............................................. (229,307) (433,506)
- -------------------------------------------------------------------------------
Net Increase (Decrease)..................................... 514,952 (89,794)
- -------------------------------------------------------------------------------
</TABLE>
56
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
For a share of beneficial interest outstanding throughout each year ended
December 31:
<TABLE>
<CAPTION>
U.S. GOVERNMENT SECURITIES PORTFOLIO 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR.................... $11.65 $10.86 $12.43 $10.58 $11.63
- -------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment income............................... 0.49 0.58 0.68 0.65 0.60
Net realized and unrealized gain (loss)............. 0.70 0.79 (0.52) 1.80 (1.23)
- -------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations................... 1.19 1.37 0.16 2.45 (0.63)
- -------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM (1):
Net investment income............................... (0.50) (0.58) (1.55) (0.60) (0.39)
Net realized gains.................................. (0.54) -- (0.18) -- (0.03)
- -------------------------------------------------------------------------------------------------------------------
Total Distributions................................... (1.04) (0.58) (1.73) (0.60) (0.42)
- -------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR.......................... $11.80 $11.65 $10.86 $12.43 $10.58
- -------------------------------------------------------------------------------------------------------------------
TOTAL RETURN.......................................... 10.20% 12.62% 1.46% 24.42% (5.64)%
- -------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000'S)....................... $66,454 $35,279 $26,009 $28,192 $24,522
- -------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses............................................ 0.45% 0.49% 0.62% 0.56% 0.71%
Net investment income............................... 5.31 6.10 5.68 5.80 5.56
- -------------------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE............................... 349% 208% 501% 214% 16%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SOCIAL AWARENESS STOCK PORTFOLIO 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR.................... $20.06 $15.76 $14.32 $11.05 $11.64
- -------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment income (2)........................... 0.10 0.15 0.31 0.12 0.16
Net realized and unrealized gain (loss)............. 6.30 4.15 2.42 3.47 (0.45)
- -------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations................... 6.40 4.30 2.73 3.59 (0.29)
- -------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM (1):
Net investment income............................... (0.12) -- (0.43) (0.14) (0.24)
Net realized gains.................................. (0.42) -- (0.86) (0.18) (0.06)
- -------------------------------------------------------------------------------------------------------------------
Total Distributions................................... (0.54) -- (1.29) (0.32) (0.30)
- -------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR.......................... $25.92 $20.06 $15.76 $14.32 $11.05
- -------------------------------------------------------------------------------------------------------------------
TOTAL RETURN.......................................... 32.27% 27.28% 19.98% 33.37% (2.69)%
- -------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000'S)....................... $39,482 $21,013 $11,040 $7,055 $3,879
- -------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses (2)(3)..................................... 0.84% 0.98% 1.25% 1.25% 1.25%
Net investment income............................... 0.63 0.97 0.43 0.99 1.43
- -------------------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE............................... 14% 19% 26% 73% 137%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Distributions from realized gains include both net realized short-term and
long-term capital gains. Prior to 1996 net realized short-term capital gains
were included in distributions from net investment income.
(2) For the year ended December 31, 1996, The Travelers reimbursed the Social
Awareness Stock Portfolio for $25,093 in expenses. If such fees were not
waived and expenses not reimbursed, the per share decrease of net investment
income would have been $0.06 and the actual expense ratio would have been
1.69%.
(3) The ratios of expenses to average net assets for the years ended December
31, 1995 and 1994 reflect an expense reimbursement by The Travelers in
connection with voluntary expense limitations. Without the expense
reimbursements, the ratios of expenses to average net assets would have been
1.75% and 3.34%, respectively.
57
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
For a share of beneficial interest outstanding throughout each year ended
December 31:
<TABLE>
<CAPTION>
UTILITIES PORTFOLIO 1998 1997 1996 1995 1994(1)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR..................... $15.29 $12.22 $12.85 $10.17 $10.00
- --------------------------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income................................ 0.37 0.46 0.47 0.48 0.35
Net realized and unrealized gain (loss).............. 2.33 2.63 0.47 2.44 (0.18)
- --------------------------------------------------------------------------------------------------------------------
Total Income From Operations........................... 2.70 3.09 0.94 2.92 0.17
- --------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM (2):
Net investment income................................ (0.42) (0.01) (0.84) (0.24) --
Net realized gains................................... (0.39) (0.01) (0.73) -- --
- --------------------------------------------------------------------------------------------------------------------
Total Distributions.................................... (0.81) (0.02) (1.57) (0.24) --
- --------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR........................... $17.18 $15.29 $12.22 $12.85 $10.17
- --------------------------------------------------------------------------------------------------------------------
TOTAL RETURN........................................... 18.21% 25.29% 7.47% 29.29% 1.70%++
- --------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000'S)........................ $32,909 $21,413 $18,214 $15,340 $5,757
- --------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses (3)......................................... 0.80% 1.06% 1.07% 1.25% 1.25%+
Net investment income................................ 3.06 3.58 3.88 4.29 3.86+
- --------------------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE................................ 51% 68% 39% 25% 32%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) For the period from February 4, 1994 (commencement of operations) to
December 31, 1994.
(2) Distributions from realized gains include both net realized short-term and
long-term capital gains. Prior to 1996 net realized short-term capital gains
were included in distributions from net investment income.
(3) The ratios of expenses to average net assets for the year ended December 31,
1995 and the period ended December 31, 1994 reflect expense reimbursements
by The Travelers in connection with voluntary expense limitations. Without
the expense reimbursements, the ratios of expenses to average net assets
would have been 1.27% and 3.49% (annualized), respectively.
++ Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized
58
<PAGE>
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
THE SHAREHOLDERS AND BOARD OF TRUSTEES OF
THE TRAVELERS SERIES TRUST:
We have audited the accompanying statements of assets and liabilities, including
the schedules of investments, of the U.S. Government Securities Portfolio,
Social Awareness Stock Portfolio and Utilities Portfolio of The Travelers Series
Trust as of December 31, 1998, and the related statements of operations,
statements of changes in net assets, and the financial highlights for the year
then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits. The financial highlights for each of the years in the three-year period
then ended were audited by other auditors whose report thereon, dated February
24, 1997, expressed an unqualified opinion on those financial statements and
financial highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1997, by correspondence with the custodian. As to securities
purchased but not yet received, we performed other appropriate auditing
procedures. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial positions of the
U.S. Government Securities Portfolio, Social Awareness Stock Portfolio and
Utilities Portfolio of The Travelers Series Trust as of December 31, 1998, the
results of their operations, changes in their net assets and their financial
highlights for the year then ended, in conformity with generally accepted
accounting principles.
[KPMG Peat Marwick LLP
Signature]
New York, New York
February 8, 1999
59
<PAGE>
- --------------------------------------------------------------------------------
TAX INFORMATION (UNAUDITED)
For Federal tax purposes the Trust hereby designates for the fiscal year ended
December 31, 1998:
- Percentages of ordinary dividends paid as qualifying for the corporate
dividends received deduction:
<TABLE>
<S> <C>
Social Awareness Stock Portfolio.................. 91.05%
Utilities Portfolio............................... 70.08
</TABLE>
- Total long-term capital gain distributions paid:
<TABLE>
<S> <C>
U.S. Government Securities Portfolio.............. $753,756
Social Awareness Stock Portfolio.................. 535,746
Utilities Portfolio............................... 466,835
</TABLE>
The following percentages of ordinary dividends paid from net investment income
are derived from Federal obligations and may be exempt from taxation at the
state level.
<TABLE>
<S> <C>
Utilities Portfolio.................................... 3.17%
U.S. Government Securities Portfolio................... 23.83
</TABLE>
60
<PAGE>
Investment Advisers
--------------------
MANAGED ASSETS TRUST, HIGH YIELD BOND TRUST, CAPITAL APPRECIATION FUND, MONEY
MARKET PORTFOLIO AND
THE TRAVELERS SERIES TRUST: U.S. GOVERNMENT SECURITIES PORTFOLIO
TRAVELERS ASSET MANAGEMENT INTERNATIONAL CORPORATION
Hartford, Connecticut
THE TRAVELERS SERIES TRUST: SOCIAL AWARENESS STOCK PORTFOLIO AND UTILITIES
PORTFOLIO
MUTUAL MANAGEMENT CORP.
New York, New York
Independent Auditors
---------------------
KPMG LLP
New York, New York
Custodian
----------
PNC BANK, N.A.
This report is prepared for the general information of contract owners and is
not an offer of shares of Managed Assets Trust, High Yield Bond Trust, Capital
Appreciation Fund, Money Market Portfolio, The Travelers Series Trust: U.S.
Government Securities Portfolio, Social Awareness Stock Portfolio or Utilities
Portfolio. It should not be used in connection with any offer except in
conjunction with the Prospectuses for the Variable Annuity and Variable
Universal Life Insurance products offered by The Travelers Insurance Company or
Travelers Life & Annuity Company and the Prospectuses for the underlying funds,
which collectively contain all pertinent information, including the applicable
sales commissions.
Printed in U.S.A. VG-181 (Annual)(2-99)
